Performance preview
We forecast that profits will fall by 72.8% in 2022 compared with the same period last year.
Considering that repeated outbreaks in the second half of 2022 may affect the performance of hazardous waste business and the construction of new projects, we have lowered the company's annual profit forecast for 2022 to HK $302 million. However, we believe that the above factors are short-term, and we are optimistic about the transformation of the company's light assets and the trough of the hazardous waste disposal business after the recovery of the epidemic in 2023.
Pay attention to the main points
The epidemic will affect the development of industrial and commercial activities in 2022. We expect the volume and price of the company's hazardous waste disposal business to be both weak, but take a positive view on the future. As the COVID-19 epidemic is still repeated in the second half of the year, industrial and commercial activities are greatly affected (the year-on-year growth rate of electricity consumption of the second and third industries slowed down to 1.2% and 4.4% in 2022). The reduction of downstream construction led to a sharp contraction in market production and a decline in disposal prices. We expect the company's hazardous waste disposal business to be in line with industry trends, and 2H22 profits may be lower than previously expected. In addition, the epidemic may also lead to delays in the construction of some projects, affecting the recognition of construction revenue.
The hazardous waste industry is in a period of low pain, and the disposal price has fallen sharply under the imbalance between supply and demand. However, at the current point, we believe that the industry has ushered in an inflection point, and the elimination and restructuring of the supply side, the rationalization of investment and the repair of industrial activities on the demand side or positive signals of the industry are expected to lead to price stabilization.
In the overseas interest rate hike cycle, the company's financing cost may rise slightly. As of the end of June 2022, the company had outstanding loans of about HK $21.68 billion, of which 75 per cent were renminbi loans and 25 per cent were Hong Kong dollar loans at floating interest rates. Considering interest rate hikes in Europe and the United States, we expect the company's comprehensive financing costs to be affected by the rise, resulting in slightly higher-than-expected financial expenses.
Seek the intelligence of environmental protection business and strengthen the layout of new energy storage. The company signed a cooperation agreement with Aliyun in the field of new energy in September last year, and is expected to make use of its cloud computing, data center, artificial intelligence technology and digital capabilities to improve the intelligence of existing environmental protection businesses such as biomass power generation and solid waste disposal. At the same time, the two sides will cooperate to build virtual power plants and optimize the control of energy storage equipment. In addition, in January this year, the company signed a strategic cooperation framework agreement with Bishui, which will carry out long-term cooperation in heating, photovoltaic power stations, user-side energy storage power stations, intelligent virtual power plants and comprehensive utilization of reclaimed water and desalted water resources, as well as the regular replacement of membrane equipment in newly built water stations and water stations that have already been put into operation.
Profit forecast and valuation
Based on a more cautious expectation of hazardous volume prices, we cut our profit forecasts for 2022 Lexus 23 by 57.9% and 29.1% to HK $302 million and HK $707 million, while introducing a forecast of HK $972 million for 2024.
The company is currently trading at 5.5 times and 4.0 times earnings for 24 years in 2023. We are still bullish on the trend of light asset restructuring and volume and price recovery of the company's dangerous waste business, maintaining the target price of HK $2.20 and outperforming industry rating, corresponding to 6.4 times and 4.7 times earnings for 2023 engine, with 15.8% upside space for the stock price.
Risk.
The disorderly expansion of dangerous waste capacity led to a higher-than-expected drop in prices.