1H21 performance is in line with our expectations

The company announced 1H2021 results: revenue of HK $3.113 billion, an increase of 47% over the same period last year; net profit of HK $548 million, an increase of 36% over the same period last year; and earnings per share of HK19.16 cents (after dilution), in line with expectations. We believe that the larger increase in performance is mainly due to the reduction of value-added tax on the increase in handling capacity and water price. The interim dividend of the company is HK5.75 cents per share, which is 54% higher than the same period last year. 1) due to the gradual weakening of the impact of the epidemic in the first half of 2021, the government cancelled the temporary policy of delayed resumption of work and traffic restrictions, and all construction projects resumed construction. Revenue from construction services increased significantly by 61% year-on-year to HK $1.319 billion. 2) thanks to the price adjustment of 8% of the company's four sewage treatment plants and the addition of 65000 cubic meters per day in the first half of the year, the simultaneous increase in volume and price led to a 42 per cent year-on-year increase in the company's operating income to HK $1.151 billion.

Profitability is basically stable, with 1H2021's gross profit margin / EBITDA ratio falling respectively from 2/4.3ppt to 40% to 34.02% compared with the same period last year. The main reason for the slight decline in profitability is that the proportion of construction service revenue with low gross margin increased to 45% compared with the same period last year, resulting in a slight decline in the overall gross profit margin.

During this period, the cost is well controlled. The company's 1H21 administrative and operating expenses are HK $250 million, and the expense rate increased by 0.32ppt to 8.02% compared with the same period last year. The expenses are mainly used for the staff costs and business development expenses brought about by the acquisition and business expansion of the Tianjin Huantang project. The company's 1H21 financial expenses are well controlled, and the financial expense rate is reduced by 1.63ppt to 6.83% compared with the same period last year.

Trend of development

The production capacity of water projects will continue to increase, and the distribution of intelligent water services will be strengthened to reduce costs and increase efficiency. During the reporting period, the actual sewage treatment scale of the company was 804 million cubic meters, an increase of 7.6 percent over the same period last year, and that of reclaimed water treatment was 14.54 million cubic meters, an increase of 43 percent over the same period last year. The company's current sewage treatment / reclaimed water project capacity (including reserves) reached 558.1 / 241600 cubic meters / old, an increase of 4.2% over the same period last year. During the reporting period, the company prepared to build water projects / newly started water projects to be completed and put into operation, respectively. The handling capacity of water projects is 32.2 square meters / 113500 cubic meters / old. On the basis of the gradual increase in production capacity, the company continues to deeply cultivate and promote the intelligent water management platform to reduce the workload of front-line staff and reduce the daily operation risks and costs of the project. At the same time, the company responds to carbon neutrality and actively develops the exploration of carbon emission reduction measures for sewage treatment. We believe that the company's operational efficiency is expected to be further improved in the future.

Profit forecast and valuation

The net profit in 2021 / 2022 will remain unchanged at HK $11.18 and HK $1.252 billion, and the current H share price corresponds to a price-to-earnings ratio of 4.1x / 3.7x in 2021 / 2022. Maintain an outperform industry rating and a target price of HK $2.20, corresponding to 5.6 times 2021 p / e and 5.0 x 2022 p / e, with 36.6% upside compared to current share prices.

Risk.

The progress of the project is not as expected, and the strict environmental protection increases the cost of the company.