Waste disposal volume continues to grow
After recent research, we believe that the company's operating performance continues to grow, but exchange rate and interest rate factors will still drag down profits.
We expect the company's waste disposal volume and electricity sales volume to increase by 14.7% and 16.1% year-on-year to 16.05 million tons and 5.26 million megawatt-hours respectively in 2023, and we also expect to increase 5.4% and 6.0% year-on-year to 16.91 million tons and 5.58 million megawatt-hours in 2024, respectively.
Two new projects were put into operation in 2023, with a total daily garbage disposal capacity of 1,800 tons (800 tons in Yixian County in Hebei and 1,000 tons in Huizhou, Guangdong), which is in line with the company's goals. As of December 31, 2023, 33 projects were in operation, with a total daily processing capacity of 43,690 tons, an increase of 4.3% over the previous year. The company has yet to announce its 2024 target. We expect the company's production capacity to continue to grow this year, but since the waste incineration power generation business has taken shape, the growth rate will decline.
The sanitation business got off to a good start
In recent years, the company has advanced upstream in the industrial chain and is actively developing sanitation services in the mainland. After winning a 25-year long-term sanitation contract of RMB 3.26 billion for Quyang County, Hebei Province in June 2023, the company won a bid of RMB 1.79 billion for a 25-year sanitation contract for Dangshan County, Anhui Province in January 2024. Although according to market data, the gross margin of the sanitation industry is generally 20%-30%, which is lower than the gross profit margin of the company's main revenue from waste disposal and electricity sales (1H23:46.7%), but it can expand revenue sources. We expect the share of revenue from environmental health and other services to gradually rise from 2.8% in 2022 to 7.0% in 2025.
Exchange rate fluctuations and rising interest rates affect profits
In the first half of 2023, the company was affected by fluctuations in the RMB exchange rate and rising Hong Kong dollar borrowing interest rates. 1H23 profit after tax and net shareholders' profit decreased by 18.2% and 21.2% year-on-year to HK$660 million and HK$610 million respectively. After deducting the effects of exchange rates and interest rates, profit after tax fell only 1.6% year over year. We believe these two negative factors will still affect 2H23's profits.
Maintaining an “Overweight” rating
After measuring the above favorable (operating) and negative (exchange rate and interest rate) factors, we lowered our net profit forecast for the full year 2023-25 by 14.2%, 10.6%, and 7.1% respectively, and adjusted the target price from HK$5.10 to HK$4.50 accordingly, corresponding 8.5 times the target price-earnings ratio for 2024 and 18.7% room for growth, maintaining the “increase” rating.
Risk warning: (1) delays in project development; (2) accounts receivable risk; (3) grid-connected electricity prices have dropped sharply.