The company's H1 performance is lower than expected. Construction revenue declined significantly with the decrease in the number of new BOT water projects and the voluntary abandonment of water environment treatment businesses with heavy assets and slow cash return. The scale of the company's operating projects continues to expand, with steady growth in operating income and performance. The company's H1 investment loss is an one-off non-cash expenditure, while the continuous contraction of the water environment management business is about to hit the bottom, while the operating business is growing steadily, the company's performance inflection point is about to appear, and maintain the "buy" rating, with a target price of HK $2.62.
2022H1's performance was lower than expected. Company H1 realized operating income of 10.646 billion Hong Kong dollars, down 22.1 percent from the same period last year; realized net profit of 694 million Hong Kong dollars, down 71.3 percent from the same period last year; equivalent to 0.07 Hong Kong dollars of basic EPS. The company's H1 performance was lower than expected, mainly due to a large one-time non-cash loss and a contraction in the construction business of BOT and water environmental governance.
New projects reduced revenue from construction services declined, but operating revenue grew steadily and overall revenue quality improved. Revenue from H1 construction services fell 55.9 per cent year-on-year to HK $3.052 billion, as a decrease in new projects led to a 58.8 per cent year-on-year decline in construction revenue from BOT water projects to HK $2.233 billion and 45.2 per cent to HK $819 million from comprehensive water environment management. In the first half of the year, the company's sewage and water supply operation service revenue increased by 20.2% to HK $6.504 billion compared with the same period last year, mainly due to the continuous expansion of the company's water operation project scale, which increased by 13.1% to 3154 million tons per day compared with the same period last year. Affected by the increase in operating income and the decline in construction revenue, the quality of the company's revenue continued to optimize, and the H1 gross profit margin rose 6.4pcts to 43.3% compared with the same period last year. During the H1 period, the company had good cost control, and administrative expenses mainly related to the operating business increased by 8.7% compared with the same period last year, but the increase was far less than the 20.2% increase in operating income; financial expenses fell sharply by 36.7% as the number of construction projects declined. The company's H1 return net profit decreased significantly, mainly due to an one-time non-cash loss of about HK $1 billion caused by the additional issuance of Shangao New Energy, and the return net profit margin was about 16% during the period after excluding the loss, which was basically the same as the same period last year. In the first half of the year, the company's asset-liability ratio was 66.9%, which remained stable as a whole.
The transformation of light assets has progressed steadily, and the cash flow situation has improved. The company firmly promoted the transformation of light assets and took the initiative to reduce investment in comprehensive water environment management projects with large investment and slow cash return. The number of H1 comprehensive water environment management projects decreased from 23 to 18 in the same period, and the revenue of this sector decreased by 45.2% compared with the same period last year. With fewer projects under construction, the company's capital expenditure fell 44.3 per cent in the first half from a year earlier to HK $3.388 billion. It is expected that the company's H1 cash flow performance will continue to improve with the increase in the proportion of operating business income, and the net cash flow of operating activities is expected to become a regular employee by the end of the year.
Risk factors: macroeconomic fluctuations lead to limited demand or difficulties in payment; repeated local epidemics make the company's project implementation progress lower than expected.
Investment suggestion: the company's traditional business has expanded steadily, and the drag on the previous water environment treatment business is about to bottom out, but the construction revenue has declined significantly. We downgrade the 2022-2024 EPS forecast to 0.28 EPS 0.44 shock 0.52 Hong Kong dollars (the original forecast 0.45 shock 0.50 shock 0.60 Hong Kong dollars), the current share price corresponding to PE is respectively times that of 7-5-4. Comparable company China Water Wind unanimously expects PE to be 5 times in 2023, and the average PE of the company in the past three years is 7 times. Considering that the company is an industry leader, we give the company a certain valuation premium and give the company 6 times PE in 2023, corresponding to a target price of HK $2.62, maintaining a "buy" rating.