Drag in construction segment performance led to deceleration in 1H21 earnings growth
Aim for greater market share during 14th FYP; Improving FCF
Mature market limits future growth; Downgrade to NEUTRAL
Lacklustre 1H21 results
BEW 1H21 revenue grew 10% yoy driven by operation revenue growth from wastewater treatment (WWT, +36% yoy) and water supply (22% yoy). However, it was partially offset by decline in construction revenue (-4% yoy). Overall GPM slid 1.4ppt to 36.9% dragged by decline in its construction GPM from BOT projects and comprehensive renovation segment. Its shares of results of associates and JVs fell 22% yoy due to decrease in profit share from JVs engaging in comprehensive renovation construction service. As a result, its net profit was slightly up 7% yoy to HKD2.4bn. Net gearing ratio slightly improved to 98% (vs.101% in FY20). BEW declared interim dividend of HKD0.09/share, implying payout ratio of 37.5% (vs. 37.1% in 1H20).
Heading into 14th FYP with a mature market
In 1H21, it had c.1.4mn ton of water project commencing operation. Given it has >4mn ton of new capacity currently under construction, mgmt. maintained its full year new capacity operation add of 3mn ton. For a longer term view, mgmt. targets to reach 8% to 10% of China’s overall water treatment market by the end of 2025 (vs. 6.3% currently), translating to new capacity add between 4mn to 6mn ton per year, of which more projects will be obtained through M&A.
FCF outflow narrowed
Its continuous asset light model pursuit has eventually seen some benefits. Given most of its construction work on comprehensive renovation segment are completed, its 1H21 operating cash outflow improved to c.HKD1.3bn vs. (c.HKD4.2bn outflow in 1H20). Overall free cash flow outflow narrowed to c.HKD2.5bn (vs. c.HKD5.4bn in 1H20).
Downgrade to NEUTRAL
We revise down our FY21E-FY23E core profit by 9-14% factoring in lower construction revenue. We maintain our DCF-TP at HKD3.5 after rolling over our DCF period to FY22E. We believe the water treatment market has reached mature stage, which will limit BEW’s growth prospect (i.e. FY20-FY23E net profit CAGR of <8% vs. FY16-FY19 CAGR of >20%), hence we downgrade to NEUTRAL.