[Results analysis]: 1HFY22 net profit down 28%, dragged by decline in construction amid COVID restriction
- 1HFY22 net profit down 28% to HK$2.81 bn, below expectation, mainly due to lower-than-expected construction service
- Net profit would have declined <15% after stripping out impairments
- Expect both gross margin and operation cashflow to improve in 2H
- Our current rating is BUY with TP of HK$6.00
China Everbright Environment (CEE) (257 HK) reported a 28% decline in net profit to HK$2.81bn. After stripping out impairments (mainly coming from the impact of Ukraine war on Poland projects), net profit would have dropped by <15%. Turnover dropped 19% to HK$21.4bn. This was mainly due to substantial decline of 44% in construction service which was partly offset by 17% increase in operation service and 12% climb in finance income. In particularly, construction service of environmental energy division dropped 49%. Settlement rate of waste treatment fee dropped from 80% in 1HFY21 to around 60% in 1HFY22 due to financial constraints of local governments amid COVID. As such, operating cashflow (according to PRC accounting standard) declined 9% to HK$2.8bn in 1HFY22. During the period, CEE had new project win with total investment of Rmb1.757bn and contract value of Rmb161m. Net debt-equity ratio declined slightly to 128%. Interim DPS of HK$0.15 was declared with 2ppts higher in dividend payout ratio.
In the short term, CEE expects gross margin of operation service to improve: First, the negative impact from VAT on water division will not repeat. Second, prices of some raw materials are expected to decline along with loosened COVID restrictions. Third, operation efficiency (such as amount of waste being collected) will improve as economy is back on track. Operation cashflow (according to PRC standard) will also improve in 2H, which is on the back of 1) settlement of waste treatment fee from government is usually higher in 2H; 2) CEE did not receive any subsidy from government until in August and more payment is expected in 4Q; 3) 20 projects commenced operation during 1H which will bring in additional cashflow in 2H.
In the medium term, CEE is transitioning from high growth to high quality development with focus in enhanced technology and service quality. For example, waste-to-energy division has carried pilot programe to supply steam for industrial customers to increase green energy percentage. There are also some poorly run waste-to-energy plants which can be CEWE’s acquisition targets. With lower contribution from construction services, earnings quality will be enhanced with higher percentage from operation service. In addition, CEE is extending its geographic coverage to Hong Kong and South East Asia market.
We maintain our BUY rating with TP of HK$6.00 for its trough valuation and leading market position in waste-to-energy market.
