1H22 results in line with our forecast

Xingrong Environment announced 1H22 results: Revenue and attributable net profit rose 12.7% and 18.1% YoY (adjusted) to Rmb3.16bn and Rmb839mn or Rmb0.28 per share. In 2Q22, revenue and attributable net profit stood at Rmb1.72bn and Rmb490mn. The results are largely in line with our expectations.

Trends to watch

Continued scale-up of water supply business to boost revenue growth in 2H22. In 1H22, water supply revenue fell 6.1% YoY to Rmb1.3bn, but the segment’s gross margin picked up 2.4ppt YoY to 47.1% thanks to improved management efficiency. The firm currently has around 4.18mnt/day of water supply capacity in operation or under construction. We think the additional 0.2mnt/day project in Chengdu may further expand the water supply business, and boost revenue growth in 2H22.

Sewage treatment revenue in 1H22 rose 35.9% YoY to Rmb1.19bn, driven by increases in both volume and price. The firm now has around 4.35mnt/day of sewage treatment capacity in operation or under construction. As renovation of sewage treatment plants proceeds, we expect the segment’s ASP to rise further, bolstering earnings growth.

Environmental protection earnings driven by ASP increase and capacity expansion. In 1H22, environmental protection business revenue rose 27.1% YoY to Rmb620mn and gross margin picked up 3.7ppt YoY to 41.0%, mainly due to YoY increase in sludge treatment volume and higher ASP for waste percolate. Xingrong now has in-operation or in-progress capacity for 7,500t/day of waste-to-energy, 2,600t/day of percolate treatment, and over 1,800t/day of sludge treatment. We believe its continued capacity expansion should boost the segment’s revenue growth.

Financials and valuation

We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 8.9x 2022e and 7.8x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb6.00 (10.6x 2022e and 9.3x 2023e P/E), offering 18.6% upside from the current price.

Risks

Payment collection and project progress disappoint.