1H22 results miss our forecast

Zhefu Holding Group (Zhefu) announced 1H22 results: Revenue climbed 13.5% YoY and 7.5% HoH to around Rmb7.8bn, and attributable net profit fell 49.7% YoY and 34.8% HoH to Rmb657mn or Rmb0.12 per share. In 2Q22, revenue rose 3.3% YoY and 5.3% QoQ to around Rmb4bn, while attributable net profit fell 65.9% YoY and 37.6% QoQ to Rmb252mn. The results missed with our expectations due to logistics setbacks amid COVID-19 conditions, rapid decline in copper prices, and higher costs.

Trends to watch

1H22 revenue rose despite unfavorable market conditions; Zhefu further expanded into new areas. In 1H22, the firm’s revenue from hazardous waste treatment services rose 14.2% YoY to around Rmb7.37bn, and its revenue from clean energy equipment increased 6.35% YoY to Rmb385mn. Zhefu’s hazardous waste treatment capacity now totals 1.78mn tonnes, the largest in the industry. Meanwhile, it has ample projects under construction or to be built, including projects in Chenzhou, Hunan (370kt); Dalian, Liaoning (300kt); and Deyang, Sichuan (300kt). These projects, together with existing projects under operation, will boost the firm’s total capacity to 2.75mn tonnes. Meanwhile, Zhefu is expanding into waste residue and liquid wastes from recycling and breakdown of automotive batteries. As of end-August, the firm submitted information on its 40,000t project (breakdown of new-energy vehicle batteries) to regulators for record keeping. We believe the firm’s horizontal and vertical business expansion will drive long-term earnings growth.

Multi factors weighed on earnings in 1H22. Zhefu’s gross profit fell 20.2% YoY to around Rmb1.34bn, gross margin slid 7.3ppt YoY to 17.2%, and attributable net profit slipped 49.7% YoY to Rmb657mn in 1H22. We attribute the soft results to four factors. First, copper prices retreated rapidly. Zhefu hedged only part of its copper resources. The unhedged part weighed on its earnings. We estimate that copper gross profit fell from Rmb7,600/t a year earlier to Rmb1,100/t in 2022. Second, upstream firms suspended production, posing challenges for Zhefu to collect raw materials. Ramp-up of new projects was delayed, and capacity utilization rate was relatively low. Third, prices of auxiliary materials increased due to logistics issues. Fourth, COVID-19 caused a delay in government subsidies. Zhefu received about Rmb165mn in subsidies from the government in 1H22, lower than the level of Rmb293mn in 1H21.

Financials and valuation

We cut our 2022 and 2023 earnings forecasts 30.8% and 17.4% to around Rmb1.71bn and Rmb2.48bn given rising costs and delayed capacity ramp-up of new projects. The stock is trading at 13.9x 2022e and 9.6x 2023e P/E. We maintain an OUTPERFORM rating. We cut TP 12.0% to Rmb5.50 (17.2x 2022e and 12.0x 2023e P/E with 23.9% upside).

Risks

Fluctuations in metal prices; disappointing project implementation and capacity ramp-up; intensifying market competition.