Overall performance is still recovering, with 1H23's interim dividend payout rate as high as 46%
The company's 1H23 revenue increased 29% year over year to HK$13.731 billion, mainly due to the newly incorporated urban resources service revenue of HK$2,541 billion during the reporting period; net profit to the mother increased 124% year on year to HK$1,557 billion, mainly due to one-time non-cash losses of HK$1.09 billion due to the dilution of shares in Shankao New Energy Group (1250 HK) held by the company in the same period last year, which led to a low 1H22 base. The company's 1H23 interim dividend is HK$0.07/share, corresponding to a payout ratio of 46%. Due to the year-on-year decline in the company's water treatment service performance in the first half of the year, we lowered the company's net profit from 2023-2025 to HK$22/26/3.2 billion (previous value: HK$29/32/3.6 billion), corresponding to HK$0.22/0.26/0.32. We gave the company 11x the target PE for 2023, which is higher than its five-year historical PE average (8x), because we believe the company's asset-light transformation will help further enhance its value, but it will still take some time for the main water treatment business to recover.
Target price HK$2.42 (previous value: HK$2.61, based on 9x PE), “buy”.
Sewage and reclaimed water treatment services/water supply service revenue fell 3%/1% year on year 1H23, and the company's sewage and reclaimed water treatment service business revenue fell 3% year on year to HK$4.774 billion, accounting for 35% of total revenue. Among them, China/overseas revenue was -3%/-4%, and gross margin was -3/-7 percentage points year over year to 57%/16%. Water supply service business 1H23's revenue was -1% year-on-year to HK$1,553 million, of which China/overseas revenue was -1%/+4%, and gross margin was -3/-3 percentage points year over year to 47%/27%. The year-on-year increase in 1H23's revenue was mainly due to the newly merged urban resources service revenue of 2,541 billion yuan. In addition, the company's construction services/water environment treatment technology services and equipment sales business revenue increased 20%/10% year-on-year. Looking at the split of the construction service business, 1H23 mainly represents +48% of revenue from water plants built under BOT contracts, and -55% year-on-year revenue from construction services for comprehensive management projects.
Daily design production capacity continues to grow, 1H23 payout rate 46%
By the end of June 2023, the daily design production capacity of Beikong Water Services had reached 43.81 million tons/day, and 1H23 had added 534,700 tons/day of design capacity. Among them, BOT/TOT/BOO/commissioned operation projects/M&A projects had been added 2.98/9.5/6.29/292/55,000 tons/day respectively. 1H23. Due to various reasons such as the expiration of the commissioned operation project, the total daily design production capacity involved in the Group's withdrawal project was 1,011,400 tons/day. Looking at water treatment service projects by business type, the scale of sewage treatment/water supply service/in-hand water treatment/seawater desalination was 2450.11/1455.58/445.34/300,000 tons/day, respectively. At 1H23, the company's DPS was HK7 cents, the same as the previous year, and the corresponding dividend payout ratio was 46%.
The target price is HK$2.42, maintaining the “buy” rating
We expect the company to have a net profit of 22/26/3.2 billion HKD from 2023-2025, giving the company 11 times the target PE for 2023, with a target price of HK$2.42. Maintain a “buy” rating.
Risk warning: The progress of the project has fallen short of our expectations, and the asset-light transformation has been slower than our current expectations.