The company continued to operate and grow steadily in 2022, but overall performance fell short of expectations due to a serious decline in profits contributed by associated companies. Looking ahead to 2023, on the one hand, the scale of the company's traditional garbage disposal business has grown significantly and is expected to continue to contribute to performance; on the other hand, the new energy business continues to acquire projects, and the second growth curve is beginning to bear fruit. We lowered our 2023-2024 net profit forecast to $51.48/$6.108 billion, and added our 2025 net profit forecast by $6.909 billion to maintain the “buy” rating with a target price of HK$16.
Net profit attributable to continuing operations was 3.852 billion yuan, lower than expected. The company achieved revenue from continuing operations of 7.8896 billion yuan in 2022, an increase of 18.2% over the previous year; the net profit attributable to continuing operations was 3.852 billion yuan, a decrease of 44.21% over the previous year. The performance fell short of expectations, mainly due to the sharp decline of 52.9% year-on-year in profits of the joint venture company Conch Cement. After excluding the profit of 2,937 million yuan of associated companies, the company achieved net profit of 915 million yuan from continuing to operate its main business, which was a steady increase of 22.5% over the previous year.
The operating results of incineration power generation have been impressive, and the revenue structure continues to be optimized. In 2022, the company's waste incineration power generation scale increased significantly, receiving a total of about 12.14 million tons of household waste, an increase of 125% over the previous year, achieving feed-in electricity volume of about 3.47 billion kilowatts, an increase of 109% over the previous year, driving an increase of 113.3% over the previous year to 2,676 billion yuan in overall operating revenue. The company achieved construction revenue of 3.885 billion yuan in 2022, a year-on-year decrease of 13.5%. The company's higher gross margin accounted for an increase in operating income, which led to a year-on-year increase in overall gross margin of 3.57 pcts to 28.23%. Expenses during the company increased 3.6 pcts to 14.6% year on year in 2022, mainly due to the large number of projects under construction, and the company's new bank loans, which led to a 2.9pcts increase in the financial expenses ratio over the same period last year. Judging from the level of debt, the company's balance ratio in 2022 was 37.4%, and the overall condition remained healthy.
The expansion capacity of new projects is strong, and the second growth curve of new energy is beginning to bear fruit. The company's new project expansion has achieved remarkable results. In 2022, 26 new garbage disposal projects (including 11 mergers and acquisitions) were signed, involving a production capacity of 17,350 tons/day, resulting in a total on-hand production capacity of 56,670 tons/day, which is among the highest in the country. In addition, some of the company's new energy projects have already been put into operation. The first phase of the company's lithium iron phosphate cathode material project with an annual production scale of 50,000 tons was completed in September 2022. At the same time, the construction of an anode material with an annual output of 40,000 tons is progressing in an orderly manner and is expected to be put into operation this year. At the same time, in terms of lithium battery recycling, the company makes full use of its cement kiln resources to carry out research and development of comprehensive lithium battery recycling technology. At present, the company's self-developed resource recycling project with a disposal scale of 5,000 tons/year has been officially put into operation, and in 2022, it has signed three lithium battery recycling projects in Huaibei, Anhui, Wuhu, and Dengfeng, Henan, with a total disposal scale of 45,000 tons/year. It is expected that the company will continue to sign lithium battery recycling projects in the future, continue to contribute to increased performance, opening up a second growth curve for the company.
Risk factors: Project progress falls short of expectations; market competition is fierce; cement prices fluctuate greatly; new energy business expansion falls short of expectations.
Investment advice: Considering that the net profit of the joint venture company Conch Cement declined a lot in 2022 and the company's return on investment in joint companies declined, we lowered our net profit forecast for 2023-2024 to 51.48/6.108 billion yuan (the original forecast was 69.68/7.200 billion yuan), adding 6.909 billion yuan to the 2025 net profit forecast. The company's current stock price corresponds to 4/4/3 times PE from 2023 to 2025, respectively. Considering that the growth rate of the joint company's performance may be lower than expected, we used the company's historical average PE over the past three years minus one times the standard deviation as the target PE to arrive at a valuation of 5 times the target PE for 2023, corresponding to the target price of HK$16, maintaining the “buy” rating.