1H23's net profit increased 21% year over year; maintaining a “buy” rating, Beijing Capital City Resources announced 1H23 results on August 25: revenue increased 6.1% year over year to HK$2.54 billion; net profit increased 20.5% year on year to 190 million HKD, accounting for 50% of our predicted net profit for the full year of 2022. We maintain our 2022/2023/2024 net profit forecast of 381/519/669 million HKD, corresponding to an EPS of 0.11/0.14/0.19 HKD. Considering the company's low liquidity in the Hong Kong stock market, we gave a valuation of 8.9 times the PE forecast for 2023. Under 11.1 times Wind's unanimous expectation, there is a 20% discount on the average value of comparable companies. Our target price is HKD 0.98 (previous value: HKD 0.92, based on 8.4x 2023E PE). Maintain a “buy” rating.

Sanitation service revenue increased by 12.7%, and gross margin increased 2.1 percentage points. The company's 1H23 sanitation service revenue increased 12.7% year-on-year to HK$2.17 billion, accounting for 85% of total revenue (1H22:80%). The sector's 1H23 gross margin increased by 2.1 percentage points to 23.8% year-on-year. The main reasons were improvements in manpower and vehicle efficiency, as well as lower fuel prices and other costs. The above factors led to a 1.2/0.9 percentage point increase in gross margin, respectively. As revenue is stable and less affected by macroeconomic fluctuations, the sanitation services sector remains the company's main source of revenue and growth driver.

Orders for sanitation services are plentiful, and steady growth is expected at 2H23

According to data from Environmental Affairs, the total amount of new contracts and the annualized amount of new contracts added in 1H23 reached RMB 117.1 billion (up 8.3% year on year) and RMB 43 billion (up 13.8% year on year), respectively.

The company's 1H23 contract has an annualized amount of HK$4.79 billion (1H22:HK$4.57 billion), and the total amount of additional contracts/annualized amounts was HK$1,42/280 million (1H22:35.5/HK$6.3 billion), respectively. Considering the pace of its business expansion, we think Beijing Capital City Resources is expected to acquire more projects and increase profit margins.

We expect the company's sanitation service revenue in 2023/2024/2025 to be HK$49.0/61.4/7.50 billion, a year-on-year increase of 21.9/25.1/ 22.2%.

Revenue from hazardous waste treatment increased slightly, and gross margin increased by 3.3 percentage points

The company's 1H23 hazardous waste treatment business revenue was HK$307 million (1H22:302 million HKD), accounting for 12% of total revenue (1H22:13%), of which revenue from harmless treatment services/resource utilization services was HK$177/129 million (-2.9/+8.0% year on year). The gross margin for hazardous waste treatment increased by 3.3 percentage points to 20.3%. The main reasons were the reduction in the cost of lye solution and the commissioning of the resource-based copper sponge project. The above factors led to an increase of 1.0/2.3 percentage points in gross margin, respectively.

Risk warning: The marketization process of the sanitation industry is slower than we expected; hazardous waste treatment project operation risks.