1H22 results in line with our expectations

EIT Environmental Development announced its 1H22 earnings: Revenue grew 8.6% YoY to Rmb2.61bn (up 7.0% HoH), and attributable net profit dropped 13.6% YoY (up 72.3% HoH) to Rmb272mn, implying EPS of Rmb0.82. In 2Q22, revenue rose 9.47% YoY to Rmb1.33bn and attributable net profit dropped 12.80% YoY to Rmb143mn, in line with our expectations.

Trends to watch

Revenue maintains steady growth; earnings under short-term pressure. In 1H22, the company's municipal sanitation business generated operating income of Rmb2.06bn, up 9.55% YoY, accounting for 79.01% of the company’s total operating income. Revenue from the property cleaning business rose 5.12% YoY to Rmb545mn. In 1H22, gross margin dropped 2.45ppt YoY to 23.02%. Specifically, gross margin of the municipal sanitation business was 26.31%, down 3.38ppt YoY, and gross margin of the property cleaning business rose 0.12ppt YoY to 10.50%. We believe that the company's earnings are under short-term pressure due to rising raw material and labor costs, but its overall operation and long-term growth prospects remain sound.

Focusing on "city housekeeper" development strategy; accelerating acquisition of high-quality resources. Municipal sanitation business: In 1H22, the company won bids for multiple projects, acquired the urban lighting management and maintenance business segment of Yonghengguang Group, and signed 31 new contracts with Lvyuanzhongtan Group. Property cleaning business: The company secured around Rmb689mn in new orders. As of 1H22, property cleaning business contracts on hand reached Rmb1.87bn, and orders to be executed reached Rmb902mn. The company has established a digital and intelligent business model of city "housekeeper", which clearly defines and classifies its existing businesses. It builds professional marketing teams headed by regional leaders to provide urban solutions for cities across the country. The company has also set up a national market development center, 15 provincial market development centers, and a marketing management department. As the company adheres to the "city housekeeper" development strategy and continues to accelerate the acquisition of high-quality resources, we expect its long-term growth to remain stable.

Financials and valuation

We keep our 2022 and 2023 net profit forecasts unchanged at Rmb549mn and Rmb638mn. The stock is trading at 10.4x 2022e and 9.0x 2023e P/E. Given the intensified market competition, we cut our TP 19.4% to Rmb25, implying 15.2x 2022e and 13.0x 2023e P/E with 44.8% upside.

Risks

Market-oriented sanitation services disappoint; labor cost increases significantly; receivables collection risks.