Summary of Investment
There is a great increase in its operational business and a slight growth in its profit quality;
It will enter construction period in H2 and its construction businesses is expected to go back to rapid growth;
Its IPO in A-share market is carrying forward steadily.
The company is gaining in its operational level, has rich project reserves at hand and has strong certainty about its performance growth in the following years. It is launching its IPO in A-share market, which is expected to be completed at the end of the year, and the low valuation of its H-share may be improved at that time. We estimate, from 2017 to 2018, the net profit of the company will reach 465/580mn, and respectively, EPS of 0.45/0.56, equivalent to an PE of 8.1/6.5. We give a target price of HKD 6.40 and the Buy rating. (Closing price as at 22 Sep 2017)
Environmental energy business contributed to main revenue increments
In H1 of 2017, Dynagreen reported, respectively, an operating revenue and a profit of, respectively, RMB985 million and RMB193 million, increasing by, respectively, 18.4% and 16.45%, equivalent to an EPS of RMB0.18 compared to an EPS of RMB0.16 in the previous year. The major increment contributed to operational business went up significantly by 57% to RMB331 million and the income from construction revenue grew slightly by 2.94% yoy to RMB567 million.
In terms of profitability, the overall gross margin increased by 0.79 ppts yoy to 32.35% thanks to the increase in proportion of high gross profit operational business, but the net profit margin went down by 0.33 ppts yoy to 19.57% because the period cost rate went up by 1 ppts yoy to 12.65% due to the rapid growth in administration and finance expenses.
The operation index hits a new high
The operation quality of projects put into operation improves significantly and the garbage treatment volume and on-grid energy hit a new high. The company has put into operation 11 projects, mainly located in economically developed areas like Beijing-Tianjin-Hebei region, Yangtze River Delta and Pearl River Delta. The garbage treatment volume and on-grid energy increased by 15% and 36% respectively, to 1.75 million tons and 470 million kWh. The waste incineration plants in operation is able to dispose of garbage of 8550 tons. The operation and management capacity of the company can be seen by the fact that it owns 3 out of 11 3A-level (the highest) household garbage incineration plants domestically, respectively in Huizhou, Wuhan and Taizhou, chosen by Central Environmental Protection Association With the continuous increases in the demand of local household garbage disposal and the proportion of the household garbage disposal capacity, the operational business is anticipated to grow rapidly.
The project construction and expansion progress well
Among the projects under construction, Jurong Project(700t/d) was put into trial operation in April and Ninghe Straw Project(700t/d) has finished construction by more than 90%, Bangbu Project(1210t/d) more than70%, Tongzhou Project more than 45% and they are expected to be put into trial operation in H2 this year and H1 next year. Besides, Miyun PPP Project(1530t/d) and Shantou Project(1500t/d) is under full construction and Bobai, Zhangqiu, Hongan and Longhui Projects are under preparation. H2 this year and next year will be an intensive construction period and the construction businesses are expected to see a huge rise.
In terms of project expansion, the company is both actively developing new projects and rebuilding or expanding existing projects. Up to now, the company has signed a new contract of Tongzhou Second-phase Project and Yongjia Reconstruction-Promotion PPP Project(including a second-phase project), respectively increase disposal capacity by 1700t/d and 750t/d. The scale of projects under construction or preparation reaches 18390t/d, equivalent to 2 times of the scale of existing operational projects. Benefiting from abundant projects reserve, there is absolutely adequate incentive for result growth in the following years.
The company is gaining in its operational level, has rich project reserves at hand and has strong certainty about its performance growth in the following years. It is launching its IPO in A-share market, which is expected to be completed at the end of the year, and the low valuation of its H-share may be improved at that time. We estimate, from 2017 to 2018, the net profit of the company will reach 465/580mn, and respectively, EPS of 0.45/0.56, equivalent to an PE of 8.1/6.5. We give a target price of HKD 6.40 and the Buy rating.
The existing projects development falls short of expectation;
The acquisition of new projects falls short of expectation;
The progress of IPO falls short of expectation;
Capital and policy risks occur.
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