The company's 2023H1 performance fell short of expectations. This was due to multiple factors such as upstream recovery falling short of expectations and increased competition in the industry, but the company's revenue structure and gross margin improved markedly. On the one hand, 2023H1 is implementing strategies to reduce costs and increase efficiency and sophisticated management, and on the other hand, it focuses on smart energy projects to promote transformation. We lowered our 2023-2025 EPS forecast to HK$0.25/0.33/0.40 (the original forecast was HK$0.30/0.42/0.52), and the current stock price corresponding to PE is 3/3/2 times, respectively. Referring to the company's average PE value of 6 times over the past three years, we gave a 30% discount, corresponding to 4 times the target PE in 2023, and the corresponding target price was HK$1, maintaining the “buy” rating.
2023H1 EPS was HK$0.13, lower than expected. The company released its 2023 interim report. 2023H1 achieved operating income of HK$3,820 million, a year-on-year decrease of 9%; realized net profit of HK$264 million, a year-on-year decrease of 29%, converted to basic earnings of HK$0.13 per share. H1 performance fell short of expectations, mainly because the upstream recovery fell short of expectations, so waste production remained low. Competition in the solid and hazardous waste disposal market was fierce, and the unit price of treatment continued to drop.
The revenue structure continues to improve, and gross margin has increased markedly, but the cost ratio is under pressure. The revenue of the 2023H1 company's four major sectors, comprehensive biomass use/hazardous waste and solid waste disposal/environmental remediation/photovoltaic power generation and wind power, changed +0%/-43%/+13%/+13%/+13%, respectively. The combined revenue decreased by 9% year-on-year. As the industry and new company projects decrease, 2023H1's construction service revenue has dropped 35% year on year, and its share has dropped to 12% year on year, down 4.8 pcts year on year. The company's revenue structure continues to improve, and the cash flow situation is expected to gradually improve. 2023H1 achieved a gross profit margin of 25.1%, an increase of 2.0 pcts over the previous year, mainly because the share of construction revenue declined sharply. At the same time, the comprehensive biomass utilization project benefited from stable operation of equipment and improved fuel quality. Biomass power generation costs fell, and operating gross margin increased sharply. The 2023H1 company management/finance expense ratio was 7.7%/10.4%, respectively, with year-on-year changes of +1.5/1.7 pcts, respectively.
Implement cost reduction and efficiency strategies and sophisticated management, and focus on smart energy projects to promote transformation. Faced with difficulties such as upstream recovery falling short of expectations and fierce competition in the solid hazardous waste disposal market, 2023H1 implemented a strategy of cost reduction and efficiency, and continued to improve management. In terms of comprehensive biomass utilization, the company has further increased the fuel localization rate and continued to push fuel prices down; in terms of solid hazardous waste disposal, the company has continuously raised the level of refined operation of solid waste incineration and resource recycling projects, greatly reducing operating costs. We believe that after the market returns to rationality and the upstream gradually recovers, the company's strategy to reduce costs and increase efficiency will flourish, demonstrating its driving force for performance. In terms of smart energy, the company focuses on projects such as distributed photovoltaics, user-side energy storage, and virtual power plants. 2023H1 has expanded a total of 7 new projects (including 4 environmental restoration projects) and invested in 1 additional photovoltaic project. The total installed capacity of the PV project was 33 megawatts, 2.5 MW/5 megawatt-hours of energy storage on the user side, and a heating capacity of about 657,000 tons per year.
We believe that using the advantages of existing biomass projects and continuously developing a comprehensive smart energy business landscape, the company is expected to open up a second growth curve. 2023H1's photovoltaic and wind power projects contributed about HK$45 million in net profit, an increase of 25% over the same period last year, and are beginning to bear fruit.
Risk factors: Subsidy policy adjustments have exceeded expectations; fuel collection costs have risen sharply; industrial waste volume/price has declined.
Profit forecast, valuation and rating: Considering that 2023H1's performance fell short of expectations and the unit price of solid hazardous waste treatment continued to decline, we lowered our 2023-2025 EPS forecast to HK$0.25/0.33/0.40 (the original forecast was HK$0.30/0.42/0.52). The current stock price corresponds to P/E of 3/3/2, respectively. Referring to the company's average PE value of 6 times over the past three years, we gave a 30% discount, corresponding to 4 times the target PE in 2023, and the corresponding target price was HK$1, maintaining the “buy” rating.