The Venture Group recently issued a positive profit announcement. The Venture Group recently issued a positive profit announcement. According to the announcement, according to the company's preliminary assessment, Venture Group's net profit for FY03/2017 will increase by about 20% year-on-year compared to the FY03/2016 financial year of HK$49.715 million. However, the increase in the company's net profit is mainly due to the increase in the revenue and operating profit of the company's environmental protection business division. The environmental protection business is a new business direction that the company began to rapidly deploy in the second half of the FY03/2016 fiscal year. According to the company's profit announcement, the company's profit from the environmental protection industry layout has been gradually reflected. We expect that the profit of the environmental protection business in FY03/2017 will mainly come from construction profits.
The company's core net profit growth rate is expected to be higher than the 20% announced in Profit. According to the company's announcement on October 24, 2016, the company has granted 40 million share options. The exercise price of the share options is HK$2.58 per share and is valid for three years from October 24, 2016 to October 23, 2019. The grantees of share options are mainly company directors, employees and advisors. Among them, company directors have been granted 19.35 million share options. Although we expect stock options to incentivize employees and thus improve the company's overall operating performance, since the company's stock price had risen to HK$3.95 on March 31, we used Bloomberg tools to estimate that the share options were expected to cause losses of more than 30 million yuan to the company. We estimate that the company's core net profit after deducting share options has increased by more than 80%, and its performance has grown rapidly.
Venture Group is rapidly deploying the food waste treatment market in segments of the environmental protection industry. The company actively grasps the huge potential of the food waste disposal market segment and quickly develops layout. Since the middle of last year, the company has successively announced that it has acquired food waste treatment projects in Taiyuan, Loudi and Hefei in the form of acquisitions (all recorded in the form of BOT). Up to now, the acquisition of the Hefei food waste treatment project has not been completed. It is expected that it will accelerate the acquisition of new high-quality projects through acquisitions/tenders, etc., and increase its market share in the industry.
The Taiyuan project will be the company's first commercially operated food waste treatment project, with a total scale of 500 tons/day and an investment of about 300 million yuan. The first phase of 200 tons/day has already been put into trial operation. The project uses the company's advanced “washing pretreatment+high-efficiency anaerobic” process to transform food waste into crude oil, biogas, organic fertilizer, etc. The company is responsible for the collection, transportation and disposal of food waste. The government grants a subsidy of 309 yuan/ton, and the first phase of the project provides a guarantee of 200 tons/day. According to preliminary estimates, if the 200 tons/day treatment capacity of the project can be fully produced, 30-40% of the project revenue will come from food waste recycling revenue (the rest is government collection, transportation and disposal subsidies). The Loudi project has an investment of about 110 million yuan. It also uses a “washing pretreatment+high-efficiency anaerobic” process. It is expected that trial operation will be carried out in the 2nd quarter. The company is responsible for the collection, transportation and treatment of food waste, and the government grants a subsidy of 251 yuan/ton. It is expected that the company will accelerate the layout of the food waste treatment market and obtain high-quality projects, which will become one of the main sources of the company's performance.
Valuation: We expect the company's construction industry to develop steadily in the next 2 years. The food waste treatment BOT project that the company has already acquired will gradually contribute to profits, and the expected profits of the zero-discharge industrial wastewater business that the company is currently developing will also gradually be reflected. Based on the current stock price of HK$3.84, the company's market value is $1.92 billion, FY03/2016, and the company's net profit is 49.715 million. The company's FY03/2017 net profit is expected to be 60 million, the core net profit is estimated to be 90 million, and the FY03/2017 core net profit price-earnings ratio is 21.3 times. The company announced that it will issue CB in accordance with a specific authorization. The issuance amount shall not exceed 40 million US dollars, and the conversion price will be HK$3.5 per share. If converted, it may be converted to 88.81 million shares, accounting for 17.8% of the issued share capital.
Although issuing CB's potential conversion would dilute EPS, the lower-cost capital obtained provided reserves for the company to acquire high-quality environmental projects. We believe that profits from the environmental protection industry will inject momentum into the long-term growth of the company's performance. We believe that there is room for improvement in the company's performance in the future, so investors are invited to pay attention.
Risk warning: Project commissioning time was slower than expected; food waste collection volume fell short of expectations after the project was put into operation; Hefei project acquisition was delayed; and new project expansion was slower than expected.