2023H1 Company's performance fell short of expectations. However, the company's revenue structure continued to be optimized, with operating revenue accounting for 59%, an increase of 15 pcts over the previous year. Improved operating efficiency led to an increase in gross margin. The company has built a new growth pole around dual carbon layout collaboration and emerging businesses. The total contract for new asset-light service projects is 2,014 billion yuan, and there is still some room for growth in the future. We slightly lowered our 2023-2025 EPS forecast to HK$0.84/0.90/HK$0.99 (the original forecast was HK$0.86/0.93/1.07), gave a target price of HK$3.4, and maintained our “buy” rating.
H1 performance fell short of expectations. In 2023H1, the company achieved operating income of HK$16.297 billion, a year-on-year decrease of 24%; realized net profit of HK$2,785 million, a year-on-year decrease of 1%, converted to basic earnings of HK$0.45 per share; and a dividend of HK$0.14 per share. The company's performance in the first half of the year fell short of expectations, mainly due to a year-on-year decline in construction service revenue due to a decrease in the number of construction projects affected by the market.
The revenue structure continues to be optimized, and the increase in operating efficiency has led to an increase in gross margin. The company's 2023H1 construction service revenue decreased by 55.28% year-on-year to HK$4.07 billion. Among them, environmentally friendly energy/environmentally friendly water/green environmental construction service revenue changed -61.79%/-33.87%/-34.90%, respectively. The large decline in construction revenue was mainly due to a year-on-year decline in new construction projects. The company's operating service revenue for the first half of the year was HK$9.539 billion, the same year on year, but its share increased sharply by 15 pcts to 59% year on year, benefiting from a decline in construction revenue and further optimization of the revenue structure. Among them, environmental energy/water supply/green environmental operation service revenue changed +0.47%/+6.16%/-4.29%, respectively. The increase in environmental water operating revenue was mainly due to the increase in project water prices and the transfer of last year's input tax to expenses. Benefiting from the improved revenue structure, the company's 23H1 gross margin increased by 8.6 pcts to 44.1% year-on-year. In terms of expenses, the company's management/finance expense ratio increased by 0.7/2.8pcts to 8.2%/10.7% year-on-year in the first half of the year. The main reason for the change in the financial expense ratio was the decline in revenue and the issuance of medium-term notes and bonds. The company's overall financial situation is healthy, and the net debt ratio fell to 65% from 67% at the end of 2022.
Continue to consolidate traditional businesses, focusing on dual carbon layout collaboration and asset-light business expansion. In the first half of the year, the company obtained 25 new projects and 1 supplementary agreement for existing projects in the fields of waste-to-energy generation, sewage treatment, and comprehensive biomass utilization (14 new projects in the same period last year), involving a total investment of 3.122 billion yuan (77.7% increase over the previous year).
The company has strong ability to expand new projects, and its main business has been continuously consolidated. While deeply involved in traditional fields, the company is actively expanding collaborative business. For the first time, the company implemented new projects in Yibin, Sichuan and Huai'an, Jiangsu under the EPCO model, and stepped up efforts to promote asset-light business development. The total number of contracts for new asset-light service projects in the first half of the year was 2,014 billion yuan. Among them, the Sichuan Marcon boiler island and flue gas purification project signed by the company was the company's first sale of self-developed small-tonnage domestic waste mechanical stoves. In the first half of the year, the company set a “double carbon” target, saving about 520 tons of standard coal, reducing carbon dioxide emissions by nearly 16 million tons, and focusing on exploring businesses such as carbon asset development, carbon capture technology research and development, rooftop photovoltaics, and smart water services to create new growth points in the future.
Risk factors: The progress of the company's construction and operation projects fell short of expectations; biomass and fuel prices continued to be high; government subsidy payments progressed slowly; and the increase in garbage disposal fees fell short of expectations.
Investment advice: Considering that the number of new projects was lower than expected and the company's construction service revenue was slowing down, we lowered our 2023-2025 EPS forecast to HK$0.84/0.90/0.99 (the original forecast was HK$0.86/0.93/1.07). The current stock price corresponds to 4/4/3 times PE, respectively. We used the company's average PE over the past three years minus 1 times the standard deviation as the target PE to arrive at 4 times the target PE valuation for 2023. Therefore, we gave the company 4 times PE in 2023, corresponding target price of HK$3.4, and maintained the “buy” rating.