Key points of investment
Incident: By 2023H1, the company achieved main operating income of HK$16.297 billion, a year-on-year decrease of 24%, and realized net profit of HK$2,785 million, a year-on-year decrease of 1%.
The share of operating and financial revenue has risen to 75%, and profit margins have risen. As the company's current projects were transferred to operations, the share of 2023H1's operating and financial revenue increased to 75%. The increase in operating share led to an increase in profit margin. The 2023H1 gross sales margin was 44.14%, +8.57 pct over the previous year. 1) Operating income:
2023H1's operating service revenue was HK$9.539 billion, the same year on year, accounting for 59%, +15 pct year on year, of which environmental energy operating revenue was HK$4,540 billion, +0.5% year on year; green environmental operating revenue was HK$3.176 billion, -4% year on year, mainly due to the fact that market waste production volume remained low, and the unit price of hazardous solid waste business treatment continued to decline; environmental water operating revenue was HK$1,557 billion, +6% year on year. 2) Construction revenue: 2023H1's construction revenue was HK$4,070 billion, -55%, accounting for 25% year-on-year, -18 pct. The main reason was that the number of construction projects was affected by the market. Of these, environmentally friendly energy construction revenue was HK$2,657 million, or -62%; green construction revenue was HK$463 million, or -35%; and environmentally friendly water construction revenue was HK$950 million, or 34% year-on-year. 3) Financial revenue: 2023H1's financial revenue was HK$2,688 million, -4% year on year, accounting for 16%, +3 pct year on year.
Strong waste incineration leaders are always strong, deepening refined management to improve quality and efficiency. The waste incineration industry has entered a period of stable operation, construction scale and capital expenditure have declined. The future business model is expected to be straightened out on the C-side, and the industry's cash flow will gradually improve. The company reorganized its development strategy to further focus on the three main businesses of solid waste, flooding, and clean energy. Equipment manufacturing and environmental technology are the two main businesses to empower, focus on resource integration, and stimulate internal vitality. As a waste incineration leader, the company has achieved large-scale high profits, thanks to resource collaboration between central enterprises and diversified and low-cost financing advantages. We interpret the company's advantages in fine management and operation efficiency from the scale in hand and operating efficiency. 1) Scale: 2023H1 The company's waste incineration scale is 157,200 tons/day, ranking first in the world. Among them, the scale of the waste incineration project that has already been put into operation for environmentally friendly energy is 131,300 tons/day, and the scale under construction is 0.97 million tons/day. 2023H1 added a waste incineration project of 2000 tons/day and a kitchen waste project of 775 tons/day, boosting market expansion and consolidating its leading position. 2) Efficiency: 2023H1's environmental energy sector garbage disposal volume was 23.87 million tons, +8% year on year, 7.883 billion kilowatts, +5% year on year, average tonnes of feed-in electricity volume of 331 degrees per ton, food waste, sludge and other garbage disposal volume of 1.26 million tons, +32% year on year. The company has more than 30 projects to expand external heating business, strengthen the coordination and integration of waste sources, and promote the improvement of project operating efficiency.
Profit forecasting and investment ratings: As ongoing projects are put into operation one after another, the company's scale and profit both rise, and free cash flow will improve significantly, which is expected to usher in a valuation repair. Considering the impact of the company's project construction progress, we adjusted the net profit forecast for 2023-2025 from HK$50.47/53.88/5.766 billion to HK$46.21/46.74/4.923 billion, corresponding to 4/4/4 times PE, maintaining a “buy” rating.
Risk warning: Project progress falls short of expectations, policy risks, financial risks, and industry competition intensifies.