2021 performance is 8.0% higher than Huatai's forecast; maintain "buy"
Beijing City Resources announced full-year results for 2021: revenue rose 26.4 per cent year-on-year to HK $4.45 billion, while net profit rose 17.6 per cent to HK $502 million, 8.0 per cent higher than our forecast of HK $465 million. Based on the progress of the company's newly signed contract, we downgrade the revenue forecast of municipal sanitation business. Accordingly, we reduce the 2022 Universe 2023 homing net profit forecast to HK $560 million / 671 million (previous value: HK $599 million / 772 million), introducing the 2024 forecast of HK $775 million, corresponding to the 2022 pound 2023 EPS of HK $0.16 and 0.19 for 2024. Taking into account the low liquidity of the stock in the Hong Kong stock market, we give 10.4 times the 2022 forecast PE, which is 20% discount to the comparable company's consistent expected average of 13.0 times Wind, resulting in a target price of HK $1.66 (previous value: HK $1.41). Maintain "buy".
Excluding the impact of preferential policies on the epidemic, the profit margin of sanitation services rose to HK $3.4 billion in 2021 (a year-on-year increase of 20.6 per cent), accounting for 76.4 per cent of total revenue. Although its gross profit margin fell 3.6 percentage points to 25.9% in 2021 compared with the same period last year, excluding the impact of preferential tax and social security policies related to the COVID-19 epidemic, gross profit margin rose by 0.5% to 25.1% in 2021, highlighting the effect of continuous cost reduction and efficiency improvement under the intelligent city service model.
Sanitation service business continues to be the company's main source of income and growth engine.
Benefit from the expansion of sanitation service market
According to Frost Sullivan, the size of China's sanitation market increased from 227 billion yuan in 2017 to 309 billion yuan in 2021, to 347 billion yuan in 2022, to 535 billion yuan in 2026, to 11.4% of CAGR in 22-26, and the share of third-party operations increased from 29.7% in 2017 to 60.5% in 2021 and to 81.5% in 2026. We believe that with the expansion of the current scale of business, the company is expected to get more projects and maintain high profit margins. We estimate that the company's sanitation service revenue is expected to reach HK $4.01 billion / 4.64 billion / 5.4 billion in 2024, a year-on-year increase of 18%, 16% and 16%.
Hazardous waste disposal business is affected by cost fluctuations
The contribution income of hazardous waste disposal business in 2021 was 7.1 billion Hong Kong dollars (an increase of 47.1% over the same period last year), accounting for 16.0% of the total revenue. Revenue from harmless treatment services / resource utilization services increased to HK $444 million / 266 million (up 57.6% by 32.3%), but in 2021, gross profit margin fell sharply to 37.5% by 22.6% due to rising costs (down 8.6% by 11.3%). According to the analysis of the market, the company will suspend the expansion of harmless business and continue to dig deep into the resource business.
Risk hints: the marketization process of the sanitation industry is slower than we expected; competition intensifies; risks related to the implementation of hazardous waste disposal projects.