Key points of investment
Event: The company released its 2022 full-year results announcement.
Steady operations account for the first time over construction, and the pandemic & impairment provisions have affected profits. In 2022, as the solid waste and water industry entered a period of steady growth, the company's ongoing projects gradually entered the operating period, and construction revenue declined. Operating revenue surpassed construction revenue for the first time. The share is expected to continue to rise in the future, driving up profitability. In 2022, the company achieved construction/operation/finance revenue of HK$131, 188, and 5.4 billion respectively, a year-on-year decrease of 51.48%, an increase of 4.44%, and an increase of 10.20%. The share of operating revenue reached 51%, an increase of 15 pct over the previous year. Considering the impact of the epidemic and financial pressure, the company faced problems such as shrinking garbage volume, declining collection rate of disposal fees, and pressure on hazardous waste profits. At the same time, impairment provisions also affected the company's profits. In 2022, the company's accounts receivable, contract assets, intangible assets, plant equipment, etc. lost HK$668 million. In terms of accounts receivable, profits on a certain scale will be recovered after being paid back by the country. In addition, loss of goodwill reached HK$608 million, mainly due to impairment of overseas projects due to changes in economic conditions, inflation, etc., which was a one-time effect.
National subsidies continue to be distributed, and cash flow is expected to improve. In 2022, other central government fund budgets (including renewable energy electricity price subsidies) increased by more than 360 billion yuan to 459.4 billion yuan. In July of the same year, the State Grid released the first batch of subsidy funds in 2022. Biomass power generation accounted for 8% of 3.352 billion yuan, 2.50 pct higher than 5.89% in 2021, and the proportion of disbursements accelerated. We expect stock subsidies to be paid faster and improve the company's cash flow. Furthermore, with the reduction in the scale of the company's ongoing projects, capital expenditure will fall by a certain margin compared to before, and the company's free cash flow can be expected.
The leading solid waste leader is Hengqiang, and the three-core, two-wing strategy has been restructured. In 2022, the company restructured its development strategy to further focus on the three main industries of solid waste, water supply, and clean energy. Equipment manufacturing and environmental technology serve as two wings to empower the main business, focus on resource integration, and stimulate internal vitality. As a leading and powerful waste incinerator, the company benefits from central enterprise resource collaboration and diversified low-cost financing advantages. We interpret the company's fine management and operation advantages from the scale at hand and operational efficiency. 1) In 2022, the company's waste incineration scale ranked first in the world at 155,200 tons/day. Among them, the scale of waste incineration projects already put into operation by Environmental Energy was 128,200 tons/day, the scale of waste incineration projects under construction was 0.98 million tons/day, and the scale of new waste generation reached 4,900 tons/day throughout the year. 2) The company's average tonnage of electricity generated in the furnace was 470 degrees in 2022, a significant increase from 434 kilowatts per ton in 2018. The tonnage network rose from 272 degrees in 2015 to 332 degrees in 2022, rising steadily year by year. High tonnage power generation can effectively offset the decline, and the new project has a competitive cost advantage.
The dividend ratio increased to maintain high dividends. The company's dividend ratio has remained around 30% since 2017.
In 2022, the company's dividend was HK24 cents. The dividend ratio increased to 32.04%, and the dividend rate reached 7.25%.
Profit forecasting and investment ratings: As on-going projects are put into operation one after another, the company's profit will both rise, and free cash flow will improve significantly, which is expected to usher in a strong recovery in valuation. Considering the company's project construction progress and the impact of the proposed impairment, we adjusted the company's net profit forecast for 2023-2024 from HK$5.684/6.03 billion to HK$5047/5.388 billion. The estimated net profit to the mother in 2025 was HK$5.766 billion. The current market value corresponds to 4/4/4 times PE, maintaining the “buy” rating.
Risk warning: project progress falls short of expectations, policy risks, financial risks, increased industry competition