The results for the first half of 2023 were in line with expectations. The scale of the company's operating projects continues to expand, and operating income and performance are growing steadily. The company voluntarily abandoned the asset-heavy water environment treatment business and slow cash flow. 23H1's revenue share has been reduced to 3%. The water environment treatment business continued to shrink in the early stages, and the drag on operations is about to come to an end, while the operating business is growing steadily. An inflection point in the company's performance is expected to occur. The “buy” rating is maintained, and the target price is HK$2.0.
EPS of HK$0.15, performance was in line with expectations. In 2023H1, the company achieved operating income of HK$13.731 billion, up 29.0% year on year; realized net profit of HK$1,557 million; sales of Shangao New Energy in the same period last year resulted in a one-time loss that lowered the performance base. 23H1's net profit increased 124.4% year on year and fell 12.8% year on year after excluding its impact. The results for the first half of the year were in line with expectations. The company plans to pay an interim dividend of HK$0.07 per share, the same as the same period last year, with a dividend rate of 46%.
The recovery from new construction has driven a high increase in construction revenue, and the operation sector is operating steadily. Beijing Capital City Resources was also listed as the core factor in the company's revenue growth in the first half of 2023. Excluding this influence, the company's revenue increased 5% in the first half of the year.
Specifically, after the end of the epidemic, the resumption of BOT project construction boosted revenue of this sector by 48% year on year to HK$3.3 billion; due to the company's continued contraction of water environment construction services, 23H1's revenue fell 55% year on year to HK$370 million year on year; exchange rate factors led to a slight year-on-year decrease of 3/ 1% in sewage and water supply business revenue; project scale during 23H1 operation increased 3% year on year to 32.58 million tons/day, and average water treatment volume increased 3% to 3,975 million tons/day; sales revenue of water environment treatment technology and equipment increased 10% year on year to HK$1.16 billion . 23H1's gross margin fell by 6 pcts to 37% year on year, which is a combination of resources in Beikong City, which has a lower gross margin; and due to rising electricity and pharmaceutical prices, the company's gross margin for domestic water supply and sewage disposal services fell 3/3 pcts year on year, respectively. We believe that according to the BOT contract, the impact of rising operating costs is expected to be resolved through price increases in the future.
The company's management fee rate fell by 4 pcts to 11% in the first half of the year, due to the merger of resources in Beijongshi, where the management fee rate was lower; the financial expense ratio increased by 0.5 pct, due to an increase in interest-bearing debt and an increase in interest rates on foreign currency loans.
The asset-light transformation is progressing steadily, and the medium- to long-term cash flow situation is expected to improve. The company is firmly promoting the asset-light transformation of the government's water environment business. In the first half of 2023, the company's water environment construction service revenue fell 55% year-on-year, and about 60% of this was EPC project revenue with cash flow. The company's 23H1 customer contract project receivables increased by HK$3.99 billion over the end of the year, but water bill recovery was good, and service concession arrangement receivables decreased by HK$3.25 billion. We estimate that the company's overall net operating cash flow declined in the first half of the year, but in the long run, as the share of revenue from cash-flow projects increases, the company continues to increase its efforts to recover project funds, and the cash flow is expected to gradually improve under an asset-light transformation strategy.
Risk factors: Demand is limited or payment is difficult due to macroeconomic fluctuations; execution progress of the company's projects is lower than expected; overseas exchange rate and interest rate risks.
Investment suggestions: The company's high BOT construction revenue in the first half of 2023 slightly exceeded expectations, and we raised the scale of construction that year; however, newly acquired projects were relatively limited. Considering that weak macroeconomics may cause the company to slow down the pace of expansion, we slightly lowered the company's additional processing capacity assumptions and adjusted the 2023-2025 net profit forecast to HK$2,945/32.74/3,561 million (the original forecast was HK$2,861/33.93/4,066 billion). The current stock price corresponding to PE is 6/6/5 times, respectively. Referring to the average PE value of 7 times the company's history over the past three years, the company was given a target PE of 7 times in 2023, corresponding to a target price of HK$2.0. Give it a “buy” rating.