2021 and 1Q22 results miss our forecasts

QiaoYin City Management (QiaoYin) announced its 2021 and 1Q22 results: Revenue rose 17.8% YoY to Rmb3.33bn and net profit attributable to shareholders declined 32.1% YoY to Rmb255mn. In 1Q22, revenue grew 22.1% YoY to Rmb932mn and attributable net profit dropped 11.1% YoY to Rmb77mn. The firm's 2021 and 1Q22 results missed our forecasts, mainly due to the high base in 2020 bolstered by preferential policies amid the COVID-19 pandemic, and the notable increase in expenses in 2021.

Main business growing steadily; profitability relatively stable. In 2021, revenue from the urban and rural sanitation business rose 18.7% YoY to Rmb3.23bn, accounting for 97% of total revenue, and revenue from household waste treatment grew 58.43% YoY to Rmb84mn. Meanwhile, the firm's gross margin (GM) rose 0.3ppt YoY to 24.19% in 2021, pointing to stable profitability.

Expenses up in 2021; operating cash flow under pressure. In 2021, the firm's expense ratio rose 2.0ppt YoY to 15.5%, with its selling and G&A expense ratios up 0.2ppt and 0.7ppt YoY to 1.8% and 10.1%. R&D expense ratio rose 0.3ppt YoY to 0.4% due to increased expenses on R&D projects, including solid waste treatment and smart sanitation projects. Financial expense ratio rose 0.8ppt YoY to 3.2%, mainly due to higher interest costs of accrued liabilities and convertible bonds. In 2021, net operating cash flow fell 61.01% YoY to Rmb119mn, mainly dragged by cash payments to employees and increased taxes and charges.

Trends to watch

Orders continue to increase; strong foothold as a leading sanitation enterprise; expenses to decline. In 2021, QiaoYin won bids for a total of Rmb19.04bn in orders and secured contracts for Rmb1.42bn in annualized value, ranking No.1 in the industry. The total accepted contract amount of the company accounted for about 8.8% of the sanitation industry. In 2021, it won a bid for a waste-free and low-carbon refuse sorting project and acquired Rmb116mn in service orders to ensure full coverage of refuse sorting in the Chancheng district of Foshan in Guangdong province. We think the firm has strong project operating capabilities and is highly efficient in market expansion. We expect the firm to acquire more orders under the guidance of the "city housekeeper" strategy as it enjoys a strong foothold in the sanitation industry. In addition, it actively develops an information-based intelligent sanitation system. We are optimistic that its expenses will decline further in the future thanks to information technologies that are likely to improve its operating efficiency.

Financials and valuation

Considering the pressure on earnings from rising expenses, we lower our 2022 net profit forecast by 19% to Rmb311mn, and introduce our 2023 earnings forecast of Rmb375mn. The stock is trading at 14x 2021e and 11x 2022e P/E. Considering increased competition in the industry, we maintain an OUTPERFORM rating and cut our target price by 36% to Rmb14, implying 18x 2022e and 15x 2023e P/E, offering 36% upside.

Risks

Growth in orders disappoints; labor costs higher than expected.