DBS Group Research10 Aug 2021
- 1HFY21 net profit declined 14.6% to HK$702m, largely in line with our expectation
- Interim dividend HK$0.07 per share, down from HK$0.08 n 1HFY20; stable payout ratio at c.20%
- Net debt-equity ratio down from 125% in FY20 to 119% in 1HFY21
- Expect earnings growth to resume in 2H on improving margin for both biomass and hazardous waste treatment
1HFY21 net profit declined 14.6% to HK$702m with turnover nudging up 1.7% to HK$4.3bn; both are largely in line with our estimates. Gross margin dropped 3ppts to 30.6%, within our expectation. During the period, the amount of processed biomass raw material and household waste jumped 30% and 55% respectively while the volume of steam supplied increased 80%. These operating data were above our expectation. Nevertheless, the amount on-grid electricity on a per ton basis declined 15%, below our expectation. This was due to poor quality and low heating value of biomass raw materials. On a positive note, net debt-equity ratio declined from 125% in FY20 to 119% in 1HFY21. Interim dividend of HK$0.07 per share was declared, compared with HK$0.08 in 1HFY20.
Looking forward, China Everbright Greentech (CEG) will adopt both asset light and asset heavy strategy for different segements. For example, environmental remediation operation will be an asset light business. In particular, high growth potential comes from landfill remediation as there are over 2000 old landfill projects which need to be remediated due to higher environmental standard. CEG will give priority to those which have synergy with the existing projects. In the next stage of transformation, the company will focus in those emerging segments with higher entry barrier and core technology requirement. It will also have more collaboration with both domestic and international leading players or research institutes.
After more than a year of business transformation, we are seeing some positive results. First, the percentage of operation revenue has increased to at least 70% of total revenue, compared with 56% in 1HFY20. We expect this percentage will further increase to over 85% in FY22. Second, as construction of most biomass projects has been completed, capex will decline. Capex in 1HFY21 amounted to HK$1.7bn and the amount for FY21 is budget at HK$3bn, 25% less than FY20. Coupled with more issuance of ABN, net debt-equity ratio should continue to decline with improved cashflow.
We expect CEG’s 2H performance to be better than 1H as 1) treatment fee of hazardous waste is expected to bottom out; 2) prices of raw materials have come down which is positive to gross margin; 3) only one-third of biomass projects are currently equipped with steam generation facilities, hence steam generation capacity will further increase; 4) continuous improvement in earnings quality with climbing turnover percentage of operation revenue. We maintain our BUY rating with TP unchanged at HK$3.50.