Shareholders' net profit increased 0.8% year over year in 2022
The company's 2022 results are in line with expectations. Shareholders' net profit increased 0.8% year over year to $1,333 million (HK$, same below), similar to our forecast of $1,328 million. If the exchange loss of 110 million yuan is deducted, the profit is slightly better than expected. Last year's operation surpassed expectations. Waste disposal and electricity sales increased 26.4% and 19.4% year-on-year respectively to 13,994 kilotons and 4.53 million megawatt-hours, higher than our forecasts of 15.2% and 9.7%. Total revenue increased 21.4% year over year to 8.247 billion yuan, higher than our forecast of 7.085 billion yuan 16.4%. Gross margin fell 0.4 percentage points year over year to 30.7%, simply because (i) the revenue share of the construction business with low gross margin (gross profit margin of 15.2% in 2022) rose from 51.7% to 52.9%; (ii) the gross margin of the waste incineration power generation project that was piloted last year was low, and gross margin for electricity sales and waste disposal fell 3.6 percentage points year over year to 46.3%.
New production capacity is slowing down to help increase gross profit margins
After years of business expansion, the company turned to a slowdown in production capacity growth. Four new waste incineration power generation projects were put into operation in 2022, with a total daily waste treatment capacity of 6,650 tons, including Linfen, Shanxi (800 tons), Dazhou, Sichuan (1,200 tons), Baoshan, Shanghai (3,800 tons), and Taizhou, Jiangsu (850 tons). The cumulative daily garbage disposal capacity increased 18.9% year over year to 41,890 tons. The company aims to add 1,800 tons of production capacity to be put into operation by 2023. The cumulative daily garbage disposal capacity increased only 4.3% year over year to 43,690 tons. Slowing production capacity growth has led to a decline in construction revenue. We expect construction revenue to fall 29.2% and 13.2% year-on-year respectively in 2023-24 to $3.09 billion and $2.68 billion, and the revenue share shrinks to 41.1% and 35.0% from 52.9% in 2022. Total gross margin is expected to rise from 30.7% in 2022 to 36.5% in 2023 and 39.1% in 2024 due to low profit margins on construction revenue.
Expanding asset-light business
On the other hand, the company is expanding asset-light businesses, including environmental sanitation, integrated smart city management services, etc. Intelligent parking management is one of the comprehensive smart city management services. The company cooperates with local governments/companies in a franchise or joint venture model to collect parking fees from car owners and obtain a share of them. The revenue from the asset-light business was only 230 million yuan in 2022, accounting for 2.8% of total revenue. We expect relatively rapid growth in the future, which is expected to become a new source of revenue for the company in the long run.
We expect related revenue to increase by 30.0% and 25.0% to $300 million and $3.7 billion respectively in 2023-24, and the revenue share will rise to 3.9% and 4.8%.
The dividend ratio has risen, and the “buy” rating has been reiterated
Due to the slowdown in the growth of new production capacity and the expansion of asset-light business, the company's capital expenditure demand has declined, which is beneficial for the company to increase its dividend payout rate. We expect the payout ratio to rise from 19.9% in 2022 to 21.0% in 2023 and 22.0% in 2024. Taking into account the decline in construction revenue, we reduced the 2023-24 shareholders' net profit by 0.9% and 10.7%, respectively. Based on 7.5 times the 2023 target price-earnings ratio, we lowered the target price slightly from HK$5.50 to HK$5.10, corresponding to an increase of 30.4%. Maintain a “buy” rating.