The company's performance in 2022 fell short of expectations. Construction revenue declined markedly as the number of new BOT water projects declined and the voluntary abandonment of asset-heavy and slow-cash-flow water management businesses. The scale of the company's operating projects continued to expand, and operating revenue and performance grew steadily. The company's investment loss is a one-time non-cash expense. At the same time, the continuous contraction of the water environment treatment business in the early stages is about to bottom out, and the operating business is growing steadily, and an inflection point in the company's performance is expected to occur. Maintaining the “buy” rating, the target price is HK$2.0.
EPS was below expectations at HK$0.14. The company achieved annual revenue of HK$24.982 billion, a decrease of 10.4% over the previous year; realized net profit of HK$1,374 million, a year-on-year decrease of 67.3%; converted to basic EPS of HK$0.14. Furthermore, the company's annual dividend totaled HK$0.157 per share. As of the closing price on April 3, the dividend rate was as high as 8%. The performance fell short of expectations due to the dilution of the company's shares in the joint venture company Shangao Renewable Energy, resulting in a one-time non-cash loss of HK$1,091 million, and the company's voluntary withdrawal from investment in water environment projects.
New projects reduced revenue from construction services, but operating revenue grew steadily. The company's construction services revenue in 2022 fell 52% year on year to HK$6.085 billion, representing an incremental shift in the industry from an incremental shift to the stock market. The reduction in new projects led to a 51% year-on-year decline in BOT water project construction revenue to HK$4.626 billion; and the company's active transformation to asset light, and comprehensive water environment management revenue fell 53% year-on-year to HK$1,459 million. The company's sewage and water supply operating services revenue increased 16% year over year to HK$12.964 billion in 2022, mainly due to a net increase in operating capacity of 2.84 million tons/day during the year. In 2022, the company's gross margin increased 1.9 pcts to 39.4% year on year, reflecting an increase in the share of operating income with higher gross margin, while its gross margin remained stable. The company's management/finance expense ratio increased 2.5/3.0 pcts respectively in 2022. On the one hand, the company's operating income declined, and on the other hand, management and financial expenses increased as operating projects increased and interest rates on US bonds rose.
The asset-light transformation is beginning to bear fruit, and the cash flow situation is expected to improve. According to its 2022 annual report, the company firmly promotes asset-light transformation and actively reduces investment in comprehensive water environment treatment projects with large investments and slow cash return. In 2022, the company completely stopped investing in new asset-heavy projects in this field, and only adopted asset-light models such as EPCO and technical services. With fewer engineering projects under construction, the company's capital expenditure fell 32% year over year to HK$7.325 billion in 2022. We expect the company's net cash flow from operating activities to be corrected within the year and will gradually improve with the company's asset-light transformation strategy.
Risk factors: Demand is limited or payment is difficult due to macroeconomic fluctuations; the company's project execution progress is lower than expected.
Investment advice: The company's traditional business is expanding steadily. We expect the early water environment treatment business to bottom out, but construction revenue has declined significantly. We appropriately lowered our net profit forecast for 2023-2024 to HK$2,81/3393 billion (original forecast of 4,430/HK$5,244 million), adding HK$4,066 million to the 2025 net profit forecast of HK$4,066 million. The current stock price corresponds to PE 7/6/5 times, respectively. Referring to the company's three-year history of 7 times the average PE value, the company was given 7 times the target PE in 2023, corresponding to the target price of HK$2.0. Give a “buy” rating.