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Guozhen Environmental Protection Releases 2020 Third Quarter Report
Guozhen Environmental Protection released a report for the third quarter of 2020. The company achieved operating income of 2,536 million yuan in the first three quarters of 2020, a decrease of 1.73% over the previous year; the net profit returned to the mother was 272 million yuan, an increase of 7.21% over the previous year. The corresponding EPS was 0.40 yuan/share, achieving a weighted average return on net assets of 7.56%, down 2.36 percentage points from the previous year.
Brief review
Revenue was basically the same year over year, and gross margin increased
The company's revenue fell 1.73% year-on-year in the first three quarters of this year, mainly due to the impact of the epidemic in the first half of the year, and environmental engineering EPC business revenue declined. At the same time, the company's investment and operation business achieved relatively rapid growth while sewage treatment production capacity was continuously put into operation, and its revenue share gradually increased. Furthermore, the gross margin of the investment and operation business is relatively high. The gross margin in the first half of the year reached 42.84%, far higher than the gross profit margin of the environmental engineering EPC business. As a result, the company's overall gross margin reached 31.06% in the first three quarters of this year, an increase of 3.67 percentage points over the previous year.
Production capacity under construction continues to be put into operation, and the balance ratio is expected to decline under the asset-light model. By the end of June this year, the company already had more than 100 sewage treatment plants across the country, with a treatment scale of 5.46 million tons/day, of which 362,000 tons/day were under construction. The gradual commissioning of production capacity under construction is expected to drive the company's water treatment scale to continue to increase. Furthermore, of the 5.1 million tons/day sewage treatment capacity that the company has put into operation, the scale of trusteeship operation reached 1,645,900 tons/day, accounting for 32.27%. Since managed operating assets do not require the company's investment and financing for the early construction of a sewage treatment plant, it can effectively reduce the company's financial pressure, causing the company's balance ratio to drop to 71.17% at the end of September this year, down 2.93 percentage points from the end of 2019.
It is expected that China Energy will continue to introduce project resources to the company after entering the company
In March of this year, Guozhen Group plans to transfer part of its shares to China Energy Energy Group. After the transfer is completed, China Energy Energy Group will become the controlling shareholder of the company, while the State Assets Administration Commission will become the actual controller of the company. Since China Energy Energy Group also owns some water assets, in order to avoid competition in the industry, China Energy Energy Group is likely to inject its water assets into listed companies. At the same time, considering that Guozhen Environmental Protection's current balance ratio is at a high level, we judge that in the future, the company will probably use an asset-light model to operate this part of the water assets. By the end of June 2020, the water treatment capacity of Zhonghuan Water, the core water operation platform of China Energy Energy Group, reached 6.98835 million tons/day. It is expected that project resources will continue to be introduced into the company after the equity transfer is completed.
Maintaining the company's buying rating
Overall, although the COVID-19 pandemic affected the company's environmental engineering EPC revenue in the first half of the year, its investment and operation business has achieved relatively rapid growth since this year. At the same time, the gross margin of the investment and operation business is relatively high, thus driving the company's overall gross margin to continue to rise. Recently, Guozhen Group plans to transfer part of its shares to China Energy Energy Group. Since China Energy also has some water assets, it will involve competition issues in the industry after the transfer is completed. Therefore, we judge that China Energy Energy Group will probably hand over its water assets to Guozhen Environmental Protection for operation in an “asset-light” manner, thus continuing to introduce project resources to the company and promote the continuous expansion of the company's operating scale. We expect the company to achieve operating income of 4.422 billion yuan, 5.022 billion yuan, and 5.460 billion yuan respectively in 2020-2022, and net profit of 384 million yuan, 457 million yuan, and 519 million yuan respectively, maintaining the company's buying rating.
Risk warning: China Energy's equity transfer was terminated; the growth rate of the company's operating scale did not meet expectations.