Main points of investment
Event: the company announced its 2020 results, with revenue of HK $3.52 billion, an increase of 29.83%, and a net profit of HK $427 million, an increase of 51.71%, in line with our expectations. The weighted average ROE decreased by 1.34pct to 14.17% compared with the same period last year.
Sanitation services increased by 43.34% and contributed to the main growth, and the gross profit margin of sanitation services remained upward after deducting the impact of the epidemic.
The company's environmental service revenue in 2020 was 2.821 billion Hong Kong dollars, an increase of 43.34 percent over the same period last year. The gross profit margin of sanitation services is 29.47%, which is the same as 4.97pct. Excluding epidemic-related concessions, environmental service revenue in 2020 was HK $2.696 billion, an increase of 36.99%. After deducting epidemic subsidies, the gross profit margin of environmental service reached 24.60%, an increase in 0.1pct compared with the same period last year. In 2020, the company signed a new annualized environmental service of HK $1.048 billion, with a total amount of HK $11.266 billion. By the end of 2020, the annual turnover of the company's environmental service has reached HK $3.33 billion, with a total amount of HK $36.27 billion on hand, with enhanced long-term certainty. It is expected that the company will continue to expand its sanitation service orders with the combination of state-owned assets and equity incentives.
The epidemic has affected the downward price of hazardous waste, and rich long-term capacity reserves are expected to pick up. Revenue from hazardous waste disposal in 2020 was HK $483 million, down 10.62%, gross profit margin 41.02%, and 5.51pc, mainly due to the fact that the outbreak of the epidemic in the first half of 2020 greatly affected the business of customers upstream of hazardous waste disposal, and the average unit price of hazardous waste disposal decreased greatly under the influence of the change in supply and demand structure. In 2020, the company's harmless disposal capacity of hazardous waste was 109400 tons, an increase of 48.36%. The unit price of harmless disposal was 2575 Hong Kong dollars / ton, a decrease of 23.64%. The sales volume of hazardous waste resources was 71300 tons, a decrease of 17.07%. The unit price of resource disposal was 2822 Hong Kong dollars / ton, with a decrease of 4.76%. By the end of 2020, the company has 8 hazardous waste projects, with an operating capacity of 5887 million tons per year, and 3 projects under construction. After completion, the total production capacity of the company is expected to reach 6737 million tons per year. It is expected that with the expansion of hazardous waste capacity in the future, the impact of the epidemic will gradually fade, and the hazardous waste business will pick up.
Sanitation services are expanding rapidly, and the background of state-owned assets & management advantages contribute to the increase of profit share. 1) the environmental service business is expanding rapidly. The compound revenue growth rate of the company's environmental service business in four years reached 251.35%. The second newly signed order in 2020, the number of new large orders accounted for about 17%, and the average service life of the project reached 9 years, significantly higher than the industry average. 2) the background of state-owned assets brings the advantage of resources and capital, which helps the business development.
The major shareholder, Beijing Water Control, is a water faucet with rich channels and project resources. As of 2019H1, the group has handed over a total of 54 high-quality environmental service projects, accounting for nearly 50%, with an average gross profit margin of 22.50%, which is higher than the average gross profit margin of the project obtained by the company independently. 2.8pct. The group has an AAA credit rating and has obvious financial advantages. 3) the shareholding of the senior management team is bound to the core interests, and the management ability is outstanding to achieve higher profitability. The core management of the company holds a stake of up to 10.25%, which helps to stimulate the vitality of the team. In 2019, the gross profit margin of the company's environmental service was 24.50%, which was higher than the industry average of 2.66 pct.It continued to rise to 24.60% in 2020. 4) strengthen the investment and promotion of mechanization and intelligence in sanitation, and complete the construction of 21 intelligent sanitation projects in 2020, with an application rate of 30%, providing a basis for subsequent intelligent construction and upgrading.
Profit Forecast: we maintain the 2021-2022 homing net profit forecast of HK $465 million, and the projected homing net profit in 2023 is HK $775 million, corresponding to the 2021-2023 EPS of HK $0.13 pm. The current market capitalization corresponds to the 10-7-6 times of PE in 2021-2023, maintaining the "buy" rating.
Risk hint: the marketization rate is less than expected, the market competition intensifies, and the profit margin decreases.