The target price is HK$4.55, maintaining the “buy” rating
Everbright Environmental announced 1H23 results on August 29: Revenue fell 24% year on year to HK$16.3 billion, and net profit to parent fell 1% year on year to HK$2.79 billion, accounting for 65% of our annual net profit forecast. We maintained our 23-25 net profit forecast of 43.1/45.8/HK$4.93 billion, giving the company 6.5 times the forecast PE for 2023 (comparable company Wind's unanimous expected average value: 6.5 times), and the target price was HK$4.55 (previous value: HK$4.69, based on 6.7x 2023E PE). Maintain a “buy” rating.
Operating service revenue remained the same year on year. The Environmental Energy Division's feed-in electricity volume was +5% year-on-year. Everbright Environment is the world's largest waste-to-energy investment operator. Its Environmental Energy and Green Environmental Protection Division implemented a total of 188 waste-to-energy projects (including 1 commissioned operation project and 1 EPCO project), with a domestic waste treatment capacity of 157,200 tons/day. The company's operating service revenue for the first half of the year was HK$9.54 billion, the same as the previous year, accounting for 59% of total revenue (1H22:44%). The Environmental Energy Division completed garbage disposal volume of 23.87 million tons, +8% year-on-year, and feed-in electricity volume of 7.89 billion kilowatts, +5% year-on-year. We expect Everbright Environment to solidify its market position with its extensive industrial chain layout in the next few years.
Revenue from construction services has declined sharply, and transformation is important
The company's construction services revenue fell sharply by 55% year-on-year to HK$4.07 billion, accounting for 25% of total revenue (1H22:43%). The number of waste-to-energy projects under construction in the environmentally friendly energy sector was reduced from 11 in 1H22 to 8, and the corresponding design production capacity dropped from 4.09 million tons/year to 3.52 million tons/year. As a result, we expect the company's 2H23 construction services revenue to decline year over year. The company's priorities go hand in hand to increase its share of asset-light business. 1H23 undertook a total of about RMB 2,014 billion in asset-light business contracts, accounting for more than 60% of the total for the full year of 2022.
1H23 dividend payout ratio 31%, cash flow may continue to improve
The company's 2022 dividend payout ratio was 32.0%, higher than the average of major companies in the industry (20.8%). The 1H23 interim dividend was HK$0.14, corresponding to a dividend payout ratio of 30.9%. As projects under construction are put into operation one after another, operating income increases, capital expenditure decreases, and state reimbursements may improve, we believe the company's operating quality and free cash flow will further improve. As a leading environmental management enterprise, the company is leading in scale in solid waste and water treatment, continues to improve cash flow, and is expected to usher in a revaluation.
Risk warning: Construction service revenue fell more than expected, waste-to-energy project operation risks, collaborative development of solid waste treatment fell short of expectations, competition for biomass power generation and hazardous waste disposal intensified.