1H22 results in line with our expectations

QiaoYin City Management (QiaoYin) announced its 1H22 results: Revenue rose 22.9% YoY (up 7.9% QoQ) to Rmb1.91bn and attributable net profit rose 3.9% YoY and 48.9% QoQ to Rmb156mn (Rmb0.38/sh). In 2Q22, revenue grew 23.6% YoY to Rmb982mn and attributable net profit rose 24.4% YoY to Rmb79mn. The company's 1H22 results were in line with our expectations.

Trends to watch

Main business grew steadily; GM of the sanitation business increased despite headwinds. In 1H22, revenue from the company's urban and rural sanitation business grew 22.3% YoY to Rmb1.85bn, mainly due to the increased number of projects operated by the company. In 1H22, the company's gross margin (GM) fell 0.4ppt YoY to 24.8%. GM of urban and rural sanitation business rose 1.16ppt YoY to 24.8%. The company's gross margin rose QoQ despite COVID-19, which we think reflects its effective cost controls.

Reducing expenses through effective management. The company has implemented a range of measures to strengthen its management effectiveness and enhance its business intelligence. For example, we think its efforts to optimize its cost controls have paid off, with 1H22, expense ratio decreasing 0.09ppt YoY to 14.9%. Specifically, selling expense ratio decreased 0.70ppt YoY to 1.10%, the G&A, R&D and financial expense ratios increased 0.01ppt, 0.37ppt, 0.23ppt YoY to 9.87%, 0.63% and 3.25%. The increase in financial expenses was mainly due to increased interest expenses on convertible bonds and fees paid to financial institutions. The increase in R&D expenses was mainly due to higher expenditure on solid waste treatment, intelligent sanitation and other R&D projects.

Sticking to the ’city housekeeper’ strategy; accelerating horizontal expansion. In 1H22, the company contracted Rmb5.06bn new orders, with annual income of Rmb620mn. It ranked among the top in the industry in 1H22 in terms of new orders, and it had Rmb55bn orders to be fulfilled. As for the business model, the company entered important markets such as Shanghai, and signed 32 new projects in different regions. It has expanded the city housekeeper business through which it provides comprehensive sanitation services to 26 provinces across the country. Given higher-standard urban governance requirements, market-oriented orders are shifting from small single-business orders to diversified and integrated urban-rural sanitation solutions. As a pioneer of the city housekeeper model, the company has significant competitive advantages which can bolster its long-term growth.

Financials and valuation

We maintain our 2022 and 2023 net profit forecasts at Rmb311mn and Rmb375mn. The stock is trading at 16.1x 2022e and 13.3x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb14, implying 18.4x 2022e and 15.3x 2023e P/E, offering 14.6% upside.

Risks

Growth in orders disappoints; labor costs higher than we expect.