The net profit of shareholders in 2020 increased by 82.1% compared with the same period last year, slightly higher than our forecast of HK $500 million. The total revenue increased by 21.2% over the same period last year, mainly due to: (1) the substantial growth of SI (system integration) business, and the related revenue increased by 23.5% year-on-year; and (2) IBO (investment, construction and operation) revenue could still rise 17.3% year-on-year under the epidemic. Gross profit margin fell from 26.4% in 2019 to 23.9% in 2020, as Brazilian projects increased fuel costs. The company's three natural gas power generation projects in Myanmar, a joint venture with the China Technology Import and Export Group, were launched in the middle of last year, driving the share of profits of the joint venture company up 294.1% from a year earlier. The company's financial position improved, and the net debt ratio (net debt / shareholders' equity) fell from 114.9% in 2019 to 64.3% in 2020.
Myanmar's political situation fluctuates, and the company maintains local daily operations.
Operational risk in Myanmar, the company's main market, increased significantly in 2021. After the Burmese military announced the takeover of the government led by Aung San Suu Kyi in February this year, the local political situation fluctuated, and the military police clashed with the people. Myanmar project currently accounts for a total of 72.2% of the company's total installed capacity or 63.9% of the installed capacity, accounting for a relatively large proportion. At last week's results meeting, the company said to maintain local day-to-day operations and effectively ensure the safety of assets and employees. We believe that political fluctuations may affect local industrial and commercial activities and electricity demand. The development of the local political situation remains to be seen.
Expand the diversification of business areas
The company has its own distributed generation projects in Myanmar, Indonesia, Sri Lanka, China, Peru and Brazil, and has implemented plans to enter the UK. Management has expressed its intention to continue to expand markets in different regions, such as mainland China, to increase sources of income. We believe that this can effectively reduce the risk of regional concentration in the long run.
Lower the target price and downgrade the rating to "overweight"
Taking into account the political situation in Myanmar and other factors mentioned above, we have lowered our shareholder net profit forecasts for 2021-2022 by 7.0 per cent and 7.4 per cent respectively, and raised the risk premium assumption in the financial model. Accordingly, we have reduced the target price of discounted cash flow (DCF) analysis from HK $3.70 to HK $2.33, which corresponds to 8.9 times 2021 price-to-earnings ratio and 12.0% room for growth. Due to the narrowing of the potential increase, we downgraded our rating from "buy" to "overweight".
Risk hints: (1) project delay; (2) tight natural gas supply; (3) political risk in Myanmar; (4) slowdown in electricity demand