Main points of investment
Comments: operating income has recovered steadily; projects under construction have decreased significantly, and construction revenue is expected to decline significantly in the first half of the year. The blockade of the epidemic has been lifted, the collection, transportation and disposal of domestic waste have been carried out smoothly, and the utilization rate of project capacity is expected to recover steadily.
At the same time, the company has steadily laid out the county-level market, and has successfully independently developed the first small domestic waste incinerator prototype specially for the county and rural markets, which can meet the needs of different types of equipment from 50 tons / day to 200 tons / day. The project has signed a daily handling capacity of 150 tons and is expected to be put into use by the end of this year.
We will continue to optimize the debt structure, reduce the scale of foreign currency debt, and ease the pressure on the cost of capital. By the end of 2022, the company's foreign currency interest-bearing loans accounted for about 21%. In the first half of the year, the company issued 2 billion yuan annual interest rate 3.50% medium-term bills and 2 billion yuan annual interest rate 3.10% medium-term bills to replace high-cost debt and ease the pressure on the cost of capital.
The proportion of operating business has increased, capital expenditure has decreased, and free cash flow is expected to return to positive this year if the state subsidy maintains its payback efforts last year. In 2022, the share of operating income exceeds that of construction services for the first time, and this trend is expected to continue in 2023, and the income structure will continue to be optimized. in an optimistic situation, if the state subsidy maintains last year's payment strength, the free cash flow is expected to return to positive this year; in a pessimistic situation, if the state subsidy is less than expected, considering that construction income will remain in a downward trend in the next three years, it is expected to be achieved by 2024 at the latest.
China News Forecast: we expect the company's 23H1 revenue to fall 18.4% year-on-year to HK $17.5 billion, mainly due to construction revenue from the environmental protection energy sector, and homed net profit fell 13.3% to HK $2.4 billion.
Our point of view: 2023 will be the critical year for the company to promote high-quality development, and the company will continue to focus on three core and two wings (solid waste, flooding and clean energy, as well as research institutes and equipment manufacturing wings), stabilize the main business and promote transformation. The goal is to achieve five changes, from high-speed growth to high-quality development, from investment-driven to both important and important, and from construction service income to operating income. From extensive management to fine management, from enterprise science and technology to science and technology enterprises, to build a world-class ecological environment group.
The waste incineration industry has turned to "operation is king". With the optimization of the company's revenue structure, we expect the company's operating gross profit margin to recover well in 2023 and is expected to achieve positive free cash flow this year. The company's latest closing price corresponds to a potential dividend yield of 6.9% in 2023 with a PB of 0.38xMagi in 2023. When the financial pressure on debt alleviates next year, the company is expected to increase the dividend payout ratio to ensure shareholder returns. The target of low valuation + high dividend in cash flow improvement has the potential of medium-special valuation revaluation. We adjust our profit forecast and expect the company's annual return net profit in 23-24-25 to be HK $440.48 / 5.4 billion, respectively, with a year-on-year growth rate of-5.0%, 10.2%, 11.7%, and maintaining the "overweight" rating, with a target price of HK $3.91.
Risk hint: the transformation business development is not as expected and the raw material price is rising.