FY23 gross margin increased 11.1 percentage points year over year to 41.8%
FY23's total revenue fell 39.6% year over year to $4.98 billion (HK$, same below), which is 16.6% lower than our forecast of 5.97 billion yuan, mainly due to (1) the depreciation of RMB; (2) the decline in project development, construction revenue fell 76.7% year on year to 1.02 billion yuan. The share of construction revenue fell from 52.9% of FY22 to 20.4% of FY23. Due to the low gross margin of the construction business, the overall gross margin of the company rose from 30.7% to 41.8% after the share decline, which is higher than our forecast of 40.1%. The gross margin of the FY23 construction business was 15.3%, far lower than 46.6% of the waste treatment and power generation business. Due to a year-on-year increase in general and administrative expenses of 13.5% to $660 million, the proportion of related expenses in total revenue rose from 7.0% of FY22 to 13.2% of FY23, resulting in a year-on-year decrease of 24.8% to $1.0 billion, lower than our forecast of only 8.6% of $1.10 billion. FY24 production capacity remained unchanged, which is beneficial to future dividend ratio increases
After years of development, the company's waste-to-energy business has taken shape, and the trend of production capacity growth has slowed in recent years. FY23's daily garbage disposal capacity increased 4.3% year over year to 43,690 tons, which is lower than FY22's 18.9% growth rate. Production capacity under construction/planning fell 26.9% year over year to 10,850 tons. The company aims to maintain production capacity in 2024, including during construction/planning. We believe (1) the future slowdown in capital expenditure will help increase the dividend ratio; (2) reduce the share of construction revenue and support a further increase in gross margin. We expect FY24-25's share of construction revenue to fall to 16.3% and 11.5% respectively, and the company's total gross margin will rise to 46.0% and 48.4% during the same period.
Sanitation business development can expand the company's revenue stream
FY23's sanitation business accelerated development. For example, in June last year, the company won a bid of 3.26 billion yuan for a 25-year long-term sanitation contract in Quyang County, Hebei Province. Revenue from sanitation and other services rose 50.7% year on year to 340 million yuan, and its share of total revenue increased 4.1 percentage points to 6.9% year on year. We expect our share of revenue to reach 9.0% in 2025. Although the sanitation business does not contribute much to short-term revenue, it can expand the company's revenue stream in the long run.
Maintaining an “Overweight” rating
In response to FY23's performance, we lowered our FY24-25 shareholders' net profit forecast by 2.8% and 10.3% respectively, and adjusted the target price from HK$4.50 to HK$4.40 accordingly, corresponding 8.5 times the 2024 target price-earnings ratio and 10.3% room for growth, maintaining the “gain” rating.
Risk warning: (1) delays in project development; (2) accounts receivable risk; (3) grid-connected electricity prices have dropped sharply.