[Results analysis]: 1H22 results slightly below expectation, but expect gross margin to improve in 2H
- 1HFY22 net profit declined 5% to HK$520.1m, slightly below expectation due to disappointment in gross margin
- Interim DPS of HK$0.0545 was declared, stable payout ratio at 30%
- Expect gross margin of operation services to rebound from 44% in 1H22 to 50% in 2H22
- Exploring new water related areas for long term growth
- Current rating is BUY with TP of HK$2.10
China Everbright Water (CEW) reported a 5% drop in 1HFY22 net profit to HK$520.1m, slightly below expectation. Major discrepancy was 4.8ppts drop in overall gross margin to 35% which was dragged down by higher electricity cost (up 17% yoy) and chemical cost and impact from VAT (we expected 42.7% for full year). Net debt-equity ratio nudged down 2ppts to around 90%. Interim DPS of HK5.45 (S$0.98) was declared with stable payout ratio of 30%.
During 1HFY22, CEW secured 2 waste water treatment projects and 2 O&M projects with an aggregate capacity of 0.1m tons/day, bringing the total treatment capacity of the portfolio to 7.16m tons/day. While 2 projects with capacity of 40,000 tons/day commenced operation, 16 projects with total capacity of around 1m tons/day and investment amount of around Rmb6.7bn are still under construction. Total treatment volume climbed 5% during the period. Coupled with tariff hike and extra revenue from exemption for VAT, operation revenue increased 27%. Due to financial strain of the local governments, trade receivable recovery rate dropped from 89% in 1HFY21 to 69% in 1HFY22.
Going forward, gross margin is expected to rebound in 2H through 1) enhancement in efficiency in energy consumption; 2) adoption of alternative energy source (such as rooftop PV power) to reduce energy expense; and 3) no more impact from VAT. Coupled with stablisation in chemical cost, management targets to improve gross margin for operation service from 44% in 1H22 to 50% in 2H22. For business development, apart from traditional water services, CEW is actively exploring new water related areas and has identified 13 topics for innovation / R&D, including river basin renovation. CEW has also integrated design and technology divisions, so as to enhance plant operation and broaden services for customers, particularly to evolve from B2G (business to government) to B2B. In addition, more customize services are offered for industrial waste water treatment in new industries (such as semi-conductor, wafer production). These will help CEW’s long term growth.
Our current rating is BUY with TP of HK$2.10.