2021 earnings in line with our expectation

Beijing Capital Eco-Environment Protection Group announced 2021 earnings: Revenue grew 15.6% YoY to Rmb22.23bn; net profit attributable to shareholders rose 55.6% YoY to Rmb2.29bn; recurring net profit attributable to shareholders grew 19.5% YoY to Rmb1.63bn, in line with our expectation. In 2021,the company’s non-recurring gains mainly came from the disposal of non-current assets (Rmb745mn).

Refined management drives continuous growth in earnings. In 2021, the company further refined its management and improved its efficiency. It increased its water processing capacity by about 1.46mnt/day for its urban water operation business and expanded its waste incineration capacity in operation by 4,000t/day for its solid waste treatment business, driving up the revenue of its urban water operation business and solid waste treatment business by 22.3% and 44.6% YoY to Rmb8.91bn and Rmb7.69bn. Revenue from comprehensive water environment management and equipment and technological services fell by 7.1% and 18.6% YoY to Rmb1.66bn and Rmb0.45bn.

Expenses remained stable during the reporting period. The company’s expense ratio remained roughly flat YoY at 18.1% in 2021. Its cash flow from operating activities decreased by 29.4% YoY to Rmb3.15bn, mainly due to the implementation of the new accounting rules in 2021 (construction expenses of PPP projects under construction recognized as financial assets were included in cash flows from operating activities).

Trends to watch

Stepping up efforts to increase asset-light projects; business structure improving. In 2021, the company acquired a total of 51 asset-light projects with total value of contracts signed for such projects rising 122% YoY to Rmb12bn. In particular, the value of contracts signed for urban water operation stood at Rmb5bn and the value of contracts signed for the ecological environment business stood at Rmb6.7bn; the value of new asset-light contracts for solid waste and industrial gas treatment also increased steadily YoY. We believe that the company is optimizing its investment standards and paying equal attention to asset-light and asset-heavy projects, and this could help to further optimize its business structure and improve the quality and stability of its earnings.

Public offering of REIT to expand financing channels and invigorate existing assets. In 2021, the company officially launched one of the first water utility-related real estate investment trusts (REITs) in China on the Shanghai Stock Exchange, showcasing the company's high-quality underlying assets and strong ability to operate its assets. We believe that the REIT could help the company expand financing channels, invigorate existing assets and improve the liquidity of existing assets. As REITs impose high requirements for project operations and cash flow quality, we expect the company to further strengthen its competitive advantage as an industry leader.

Financials and valuation

We maintain our 2022 net profit forecast at Rmb2.12bn and introduce our 2023 net profit forecast at Rmb2.44bn. The stock is trading at 11x 2022e and 10x 2023e P/E. We maintain our OUTPERFORM rating and target price of Rmb4.20 (15x 2022e and 13x 2023e P/E), offering 29% upside.

Risks

Disappointing progress of projects; declining profitability.