The company's 2022 performance fell short of expectations, and the profit margins of the sanitation and hazardous waste business were under pressure. In 2022, when local epidemics were frequent, the company signed new sanitation orders totaling HK$8.07 billion, continuing to consolidate its leading position in the industry; as the impact of the epidemic is completely eliminated, the company's gross margin for sanitation and hazardous waste will improve in 2023; the company actively explores urban management services and continues to expand new business through shareholder background. We appropriately lowered the 2023 EPS forecast to HK$0.10 (the original forecast was HK$0.12), maintained the 2024 EPS forecast of HK$0.13, added the 2025 EPS forecast of HK$0.17, and maintained the company's “buy” rating, with a target price of HK$0.61.

EPS was below expectations at HK$0.08. The company achieved revenue of HK$4.946 billion in 2022, up 11.1% year on year; realized net profit of HK$278 million, down 44.7% year on year; converted to EPS of HK$0.08. The performance fell short of expectations, mainly because the profit margin of the sanitation business declined due to high energy prices and rising labor costs; competition in the hazardous waste business market intensified and disposal unit prices fell, and the amount of waste produced by upstream industrial enterprises decreased under the influence of the local epidemic, causing the company's hazardous waste disposal volume to decline.

Sanitation revenue grew steadily, but profit margins declined, and competition for hazardous waste intensified and disposal volumes declined, putting pressure on profits. The company's revenue grew steadily by 7.8% to HK$5.330 billion in 2022. Environmental hygiene services, which account for a relatively large share of revenue, increased 18.3% year-on-year to HK$4,024 million as new bid operating projects increased. Overall gross margin fell 5.8 pcts to 20.4% year on year, mainly due to the increase in labor costs in the sanitation business and the rise in energy prices, which led to a decrease of 4.1 pcts year on year; disposal volume in the hazardous waste business decreased accordingly due to the reduction in upstream waste volume affected by the epidemic, and increased industry competition caused the unit price of harmless disposal to drop 11.4% year on year. The increase in raw material prices in the resource business exceeded the increase in sales prices of resource-based products, leading to a year-on-year decline of 13.5 pcts to 18.4%. The company's overall expenses ratio was stable. The balance ratio rose from 48.3% at the end of 2021 to 53.6% in the same period in 2022, mainly due to the company's continuous business expansion and increased bank loans.

Actively develop urban steward service models, and strengthen shareholder backgrounds to help develop new businesses. According to the company's official website, the company adheres to the development strategy of “two engines in one”, and with its outstanding “six power management system”, on the one hand, it is deeply involved in developing various forms of urban service in the region, including sanitation, greening, public toilet maintenance, water area cleaning, and urban property services in cities, urban villages, and rural areas. In 2022, the company won a new bid for the 3.87 billion yuan urban management project, with an annualized amount of up to 660 million yuan, which is at the forefront of the industry. On the other hand, the company used its shareholder background to accelerate the development of integrated services for hydrostatic ecological elements, laying a solid foundation for future market development.

Risk factors: The company's project expansion fell short of expectations; the government's ability to pay declined; labor costs rose sharply; industry competition intensified; and commodity prices fluctuated sharply.

Investment advice: As competition in the hazardous waste industry intensified in 2022, the company's disposal unit price declined, and the growth rate of the company's new sanitation orders in 2022 fell short of expectations. We appropriately lowered the 2023 EPS forecast to HK$0.10 (the original forecast was HK$0.12), but we expect the company to accelerate the progress of sanitation contract signing as the economy recovers, so we maintain the 2024 EPS forecast of HK$0.13 and add the 2025 EPS forecast of HK$0.17. The current stock price corresponds to PE 6/4/3 times, respectively. Referring to the company's 1-year history of 6 times the average PE value, the company was given 6 times the target PE in 2023, corresponding to the target price of HK$0.61.