The decline in construction revenue and the impact of the epidemic dragged down performance. In the second half of the year, Shanghai Environment 1H22 was expected to achieve operating income/net profit of 2,479/278 million yuan, a year-on-year decrease of 35.3%/33.0%, and 2Q22 achieved operating income/net profit of 1,243/128 million yuan, a year-on-year decline of 55.1%/39.6%. The year-on-year decline in 1H22 performance was mainly due to the year-on-year decline in construction revenue of PPP projects of about 1.2 billion yuan to 95 million yuan, the insufficient release of production capacity for some newly launched projects, and a sharp increase in epidemic prevention and anti-epidemic expenses over the same period last year. We lowered the gross profit margin of solid waste operations. The net profit attributable to the mother in 22-24 is estimated to be 635/749/882 million yuan (previous value: 794/994/1,088 million yuan). Considering that the company is a leading solid waste treatment leader in Shanghai, the projects in hand are of high quality, the epidemic was effectively controlled in the second half of the year, and the profit level is expected to be repaired. It was given 20.9xPE in 2022 (referring to the comparable company's 2022 Wind forecast average PE value of 13.9x), with a target price of 11.91 yuan/share (previous value: 13.49 yuan/share, based on 2022 19.0xPE), the “buy” rating was reiterated.
The scale of projects under construction has been reduced, and the attributes of high-quality operators have been strengthened
In terms of projects under construction, the company's Fengxian District Renewable Energy Comprehensive Utilization Center project was put into trial operation in January 2022. The reduction in the scale under construction led to a marked decline in construction revenue and cash flow expenses from investment activities. As of June 30, the company operated 27 domestic waste incineration projects, including 6.9301 million tons of factory waste, an increase of 23.6% over the previous year (including the commissioned operation of Laogang Phase I and Phase II). The amount of feed-in electricity was 2,412 billion kilowatts, an increase of 33.0% over the previous year. The increase was largely due to the commissioning of Jinhua, Jinzhong, Fengxian Phase II and Xinchang incineration projects. We expect the company's solid waste operating revenue to account for 63.2% in 2022, an increase of 21.1 percentage points over the previous year. The development of the industry has entered the stage where operation is king. We believe that with the advantages of operation management and cost control, the characteristics of high-quality operators in Shanghai are expected to be highlighted.
Actively promote emerging businesses, and combine the importance of asset models
With the three asset-light businesses of “planning consulting, ecological restoration, agency construction and hosting” and the three asset-heavy businesses of “household waste, hazardous medical waste, sewage treatment” as the main development line, the company successfully expanded the franchise project for harmless treatment and resource utilization of agricultural and animal husbandry solid waste in Lanling County in the first half of the year. It completed more than 40 environmental restoration projects, won the bid for the 2022-2024 soil groundwater inspection project in Qingpu District, and signed 131 new technical service contracts to lay the foundation for the company's transformation, upgrading and sustainable development.
Abundant cash flow, reaffirming the “buy” rating
In the first half of the year, the company's net operating cash flow fell from 430 million yuan to 282 million yuan. If the construction expenditure of the PPP project is not taken into account, the company's operating cash inflow increased by 15 million yuan over the same period last year. We expect that the commissioning of waste incineration projects will bring abundant operating cash inflows, guarantee the company's sustainable development capacity, and provide strong support for new business development.
Risk warning: The amount of waste incineration stored fell short of expectations, and the impact of the epidemic on project operations exceeded expectations.
