Net profit returned to the mother increased 23% in 2022, maintaining the “buy” rating

Overseas Chinese Bank Co., Ltd. achieved revenue/net profit of 3,955/ 315 million yuan in 2022, +19/ +23% year on year. Guimu's net profit exceeded Huatai's expectations by 14% (forecast: 277 million yuan). 1Q23 revenue/net profit of the mother was 984/106 million yuan, +6/ +38% over the previous year. The profit increase was mainly due to the investment income of 31.43 million yuan from the transfer of 70% of the shares of Xiangtan Parking Service Company. According to the company's on-hand order size and cost control measures, we raised the urban and rural sanitation and cleaning revenue forecast and lowered the sales/management expense ratio forecast. The estimated net profit attributable to the mother in 23-25 was 3.68/4.33/505 million yuan (previous value: 3.28/385/100 million yuan), and the corresponding EPS was 0.90/1.06/1.24 yuan. Considering that the company's ROE is higher than the industry average, growth prospects can be expected, and a certain premium will be given, giving 17.2x PE in 2023 (see comparable company Wind's consistent forecast for 2023 PE) The average value is 14.3x), and the target price is 15.48 yuan/share (previous value: 12.65 yuan/share, based on 2022 18.6x PE), maintaining the “buy” rating.

Revenue structure continues to be optimized, and cost control effectively increases gross profit margin

Benefiting from the continuous increase in the number of sanitation operating projects, the company's urban and rural sanitation business revenue in 2022 was +18.1% year-on-year to 3.80 billion yuan, driving total revenue +19% to 3.95 billion yuan over the same period last year. The company is based in Guangdong and covers the whole country. In 2022, the company's projects have covered more than 80 cities across the country, and the business layout has been expanded to 26 provinces, laying a solid foundation for the continuous development of future performance. The share of revenue in South China was -0.7 pp to 43.5% year-on-year, and the revenue structure continued to be optimized. The comprehensive gross margin was 25.4% (+1.2pp compared to the previous year), which highlights the company's effective cost control under the “Big City Manager” strategy.

Orders in the sanitation service industry reached a record high. The total number of bids won by the company ranked first in the industry, and the national sanitation market maintained a growing trend. According to statistics from Environmental Sinan, the total annual amount of sanitation service projects opened nationwide in 2022 was 82.3 billion yuan and the total number of contracts was 251 billion yuan, all of which reached record highs. The company's leading edge continues to be highlighted. The total number of annual bids won reached 9.287 billion yuan, ranking first in the industry for three consecutive years, with an additional annual service amount of 1,286 billion yuan. Since 2023, the company has successively won bids for a number of projects, including a bid of 550 million yuan for an integrated urban and rural sanitation market-based procurement project in Gaozhou City, Guangdong Province, which will strongly guarantee future performance.

Expense control has shown results, and operating cash flow has improved markedly

The company's expense ratio in 2022 was -0.2 pp to 15.2% year on year. Among them, cost control promoted sales expenses by -30% compared to the same period last year, increased solid waste/smart sanitation R&D led to R&D expenses +147% compared to the same period last year, and increased interest expenses led to financial expenses +45%. Operating cash flow was +53% year-on-year to $182 million, due to an increase in the amount of tax rebates received and a decrease in security deposits paid.

Risk warning: The progress of sanitation marketization falls short of expectations, the scale of new orders falls short of expectations, and increased project competition affects profit prospects.