Net profit returned to the mother in 2022 fell 42% year on year, maintaining the “buy” rating

Beijing Holdings Urban Resources announced its 2022 results on March 29, achieving annual operating income/net profit of HK$4946/278 million of HK$278 million, +11.1%/-44.7% compared to the previous profit forecast (-40% year on year). Excluding the impact of preferential effects of the 2021 pandemic, net profit returned to the mother in 2022 was -41.8% year-on-year. Due to increased market competition and rising operating costs, we lowered the company's gross margin forecast. The net profit returned to the mother for 23-25 is estimated to be 381/519/669 million HKD (previous value of HK$517/610/100 million), and the corresponding EPS is HK$0.11/0.14/0.19. Referring to the comparable company's 2023 Wind, they agreed to expect an average PE value of 10.5x. Considering the company's low liquidity in the Hong Kong stock market, the company was given 8.4x target PE in 2023, corresponding to the target price of HK$0.92 (previous value of HK$1.26, based on 10.5x PE in 2022) to maintain a “buy” rating.

Revenue from sanitation services is growing, and rising costs are putting pressure on gross margins

The company's sanitation service revenue in 2022 was HK$4,024 million (+18.3% year-on-year), accounting for 81.4% of total revenue (+5pp year-on-year), with a gross profit margin of 21.8% (year-on-year - 4.1pp); the decline in gross margin was mainly due to rising wages/oil prices/cancellation of epidemic concessions. The above factors led to a decrease in gross margin of 2.6/0.8/0.7 pp, respectively. The company continues to strengthen digitalization and intelligent equipment construction, and human efficiency and vehicle efficiency may be further improved.

The impressive performance of new sanitation orders is expected to drive steady revenue growth

By the end of 2022, the company's sanitation service had a total of HK$32.23 billion in order execution, with an annual increase of HK$4.92 billion in on-hand orders; the total number of new orders added in 2022 was HK$8.07 billion, adding orders of HK$1.22 billion per annum, and new orders contributed HK$4.6 billion in revenue that year. The annualized amounts of the company's on-hand orders and new orders in 2022 both reached record highs, and we believe that abundant orders are expected to drive steady growth in sanitation service revenue in 2023.

Hazardous waste treatment performance is under pressure

The hazardous waste treatment business achieved revenue of HK$612 million in 2022, with a gross profit margin of 18.4%, compared to -13.8% /- 13.5 pp. The decline in gross margin was mainly due to lower sales prices/higher freight costs/higher unit prices of raw materials and consumables/increased harmless depreciation. The company's harmless volume/price/gross margin in 2022 was -9%/-11% /- 18.8 pp, and the resource volume/price/gross margin was -20%/+19% /- 4.6 pp compared to the same period last year. By the end of 2022, the company's harmless operation/construction scale was 35.10/88,700 tons/year, and resource-based operation scale was 270,000 tons/year.

Risk warning: The marketization process of the sanitation industry has been slower than we expected, the cost of sanitation services has risen more than expected, and competition in the hazardous waste treatment market has intensified.