Win the bid for 3.26 billion yuan long-term sanitation contract
Yuefeng Environmental Protection's light assets business has made a major breakthrough. At the end of June this year, the company announced that it had won the bid for a 25-year sanitation project in Quyang County, Hebei Province, operated by TOT (transfer-Operation-transfer) mode, with a total contract value of 3.26 billion yuan.
Promote the growth target of sanitation revenue
The company operates 18 sanitation integration projects in 2022, covering Guangdong, Guangxi, Sichuan, Hebei and other places. Sanitation and other light assets business income accounts for 2.8% of the total revenue (note: the company does not disclose sanitation income separately). Winning the project will help the company push its target of 10% of sanitation revenue in the next 3-5 years.
The project that has just won the bid involves 2.68 million square meters of road cleaning and cleaning in Quyang County, the collection and transportation of domestic garbage in the built area (including 163residential areas), road cleaning and cleaning in 17 villages in the city, and the integrated implementation of urban and rural sanitation in 18 townships, as well as the compression, transportation and disposal of domestic waste throughout the county.
The duration of this project is much longer than the general 3-6-year arrangement in the market, ensuring long-term stable income. Based on 25 years, the average annual income of the project is expected to reach 130 million yuan, equivalent to about 62.8 percent of the company's income of 230 million Hong Kong dollars (about 210 million yuan) from the company's youth assets business (including sanitation). Assuming that the project starts operation within this year, the income of the young assets business will increase significantly this year and next.
The steady development of core business can contribute to the rise of gross profit margin
Due to the scale of development, the company's core business of waste incineration power generation will develop steadily, and the number of projects under construction / planning will also be reduced. As a result, we expect the share of construction revenue to fall from 52.9% in 2022 to 37.0%, 31.9% and 24.0% in 2023-2025, respectively. On the contrary, the proportion of operating income from waste power generation has increased from 42.3% to 57.5%, 61.8% and 68.7% in the same period.
Since the gross profit margin of construction income has always been low, which is equivalent to about 1/3 of the operating gross profit margin, the company's overall gross profit margin is expected to rise from 30.7% to 37.8%, 40.0% and 43.2% in the same period.
The fluctuation of exchange rate and interest rate in recent months has an adverse impact on profit forecast.
In recent months, the company is affected by the following external factors: (1) the company's financial statements are settled in Hong Kong dollars, and its profits will inevitably be temporarily affected by RMB exchange rate fluctuations in recent months. The exchange rate of the Hong Kong dollar against the RMB rose from 0.86 to an one-time high of 0.92 at the beginning of the year. (2) the rise in Hong Kong dollar interest rates will also increase the company's financial expenditure. The Hong Kong dollar prime rate rose from 5.00% last year to 5.75% recently. By the end of 2022, 28.1% of the loans were Hong Kong dollar debt, and fluctuations in Hong Kong dollar interest rates are expected to increase the company's financial expenses.
Adjust the rating to "overweight" in response to the recent rise in stock prices.
After taking into account the impact of exchange rate and interest rate fluctuations and updating the operating assumptions, we lowered the shareholder net profit forecast for 2023-2024 by 15.7% and 19.1% respectively, and added the 2025 forecast. At 7.5 times the 2024 target price-to-earnings ratio, we correspondingly reduce the target price from HK $5.10 to HK $4.60, corresponding to 13.6% room for increase. Due to the recent rise in share prices and narrowed upside, we have downgraded our rating from "buy" to "overweight".
Risk tips: (1) delay in project development; (2) risk of accounts receivable; and (3) sharp drop in grid-connected electricity price.