2021 results largely in line with our forecast
Beijing Enterprise Water Group （BEWG） announced that revenue and attributable net profit rose 10% and 0.31% YoY in 2021 to HK$27.88bn and HK$4.20bn （HK$0.41/share）。 Gross margin （GM） at the sewage treatment and water recycling business declined on increased cost of raw material chemicals and cancellation of government subsidies after COVID-19 eased.
Business growth solid. In 2021, performance of the firm’s different segments diverged. Revenue from sewage treatment and water recycling rose 30% YoY to HK$8.15bn, mainly as average treatment fees and volumes increased 9% and 16% YoY to Rmb1.39/t and 5.27bnt. Water supply revenue rose 14% YoY to HK$3.07bn, mainly as service prices and supply volumes increased 2.9% and 5.3% YoY to Rmb2.10/t and 2.15bnt.
Revenue from integrated treatment construction projects and BOT（Build-Operation-Transfer） water-plant construction fell 4% YoY to HK$13.1bn, mainly as the firm was overly cautious on investment in integrated treatment projects under the asset-light strategy. Revenue from technology and equipment sales rose 25% YoY to HK$4.06bn.
Profitability slightly weakened. Blended GM at BEWG fell 0.9ppt YoY in 2021 to 37.5%. GM at the domestic and overseas sewage treatment businesses fell 2ppt and 1ppt to 58% and 23%; remained largely flat at 48% for domestic water supply, and dropped 2ppt to 34% for overseas water supply. GM was stable at 26% for integrated environmental treatment and fell 5ppt to 18% for BOT water business, as new BOT projects offer low GM.）。 The technology and equipment sales business saw GM decline 3ppt to 49%, mainly due to a lower revenue contribution from high-GM technological services.
Trends to watch Project operating efficiency improving; new growth drivers emerging.
BEWG has total designed water capacity of 44.89mnt/day, and water operation capacity of around 29.77mnt/day. The firm secured 3.96mnt/day in new water orders. We believe that the firm’s moves in cutting emissions, technological R&D, and business synergies will improve operating efficiency. Expansion of new businesses such as sewage sludge treatment and sewage recycling should generate new earnings drivers.
Financials and valuation
We leave our 2022 net profit forecast unchanged at HK$4.86bn and introduce 2023 forecast at HK$5.3bn. The stock is trading at 5.7x 2022e and 5.2x 2023e P/E. We maintain OUTPERFORM and our TP of HK$4.00 （implying 8.3x 2022e and 7.7x 2023e P/E）， offering 46% upside.
Risks
Project progress slower than expected; FX rate changes.