Originated in 1980, Baguio Green Group (“Baguio”) has developed into a group of providing integrated environmental services, ranging from Professional Cleaning, Recycling, Waste Management and Collection, Horticulture and Landscaping, and Integrated Pest Management. The company's main business is mainly divided into four segments, including: (1) Cleaning services business; (2) Waste management and recycling business; (3) Landscaping services business; and (4) Pest management business, customers cover all walks of life and different Types of institutions, such as HKSAR Government, public utilities, and private corporations.

Core cleaning services recorded a considerable growth in 1H2022

For the six months ended 30 June 2022 (1H2022), revenue amounted to HK$714.1mn, representing an increase of 21.6% YoY. The increase was mainly due to the increase in revenue in cleaning segment with increase in number of contracts and orders during the Period. Net profit attributable to equity shareholders for the period amounted to HK$17.8mn (1H2021: HK$12.2mn), representing an increase of 45.3% YoY. Basic EPS was HK$4.29 cents (1H2021: HK$2.95 cents), with no interim dividend.

The gross profit for the period was HK$57.7 million, representing an increase of 17.6% YoY. Though there was a strong performance in cleaning segment which were partially offset by the initial operation costs from new projects in waste and recycling segment. The overall gross profit margin dropped from 8.4% to 8.1% mainly due to the initial operation costs in our new projects in waste and recycling segment. Relevant income in short run may not proportional to expenditure. In additions, the progress delay of landscaping projects and high service level demand in pest management services market with keen competition, together with the high energy price also affected the gross profit margin.

By business segment, cleaning services recorded a considerable growth in 1H2022. Revenue of cleaning services increased by 42% to HK$498.6mn, accounting for 69.8% of the overall revenue. secured a number of new service contracts from the HKSAR Government worth HK$1.6 billion. Demand for cleaning services increased due to the pandemic. Specifically, high profit margin cleaning services, such as disinfection and cleaning services for quarantine hotels, greatly contributed to the overall growth in our cleaning business and an increase in gross profit margin to 9.7% from 7.4%.

With regard to the waste management and recycling business, revenue slightly decreased by 4.9% to HK$111.8mn, accounting for 15.7% of the overall revenue. Company is contracted by the EPD to handle over 5,000 recycling spots (including plastic, glass bottles, metals and waste paper) across HK and currently operate various sorting facilities to support recycling business. Baguio is also the operator contracted by the EPD to manage three-colour recycling bins in the HK Island, Kowloon and New Territories. In Jan-2022, it won a new 33-month EPD Plastic Recycling Pilot Scheme contract to provide plastic collection services for three districts (Eastern, Kwun Tong and Central & Western). Baguio also provides plastic collection services for Recycling Stations and Reverse Vending Machines, which were introduced by EPD and other institutions in HK. In addition, the Baguio also provides collection and management services of glass bottles for the HK Island (including Islands District) and the New Territories. During the Period, the gross profit margin declined 8.4 percentage points to 3.0% due to various factors including increasing energy prices and inflation combined with a decline in the recycling rate during the pandemic., the overall decline was mainly due to the impact of our plastic recycling services. Under the EPD's Plastic Recycling Pilot Scheme, the contractor needed to invest substantial resources and costs to initiate and establish the collection network in the first half of the year. Revenue generated in the short run may not be proportional to expenditure. Management stated in the report that it is expected after the contract has commenced for a certain period of time, this short-term disproportionate issue will be improved.

In the landscaping services, revenue decreased by 9.2% to HK$56.9mn, accounting for 8.0% of the overall revenue. Projects continued to experience delays with increased logistics costs due to the ongoing pandemic, the gross profit margin declined 0.7 percentage points to 6.7%. Additionally, intense market competition affected the gross profit margin and the overall performance.

For the pest management business, revenue decreased by 15.1% to HK$46.8mn, accounting for 6.5% of the overall revenue. Since the outbreak of COVID-19 pandemic, the entry of newcomers has led to keen competition affecting the gross profit margin declined 4.3 percentage points to 4.6%.

As of 30 June 2022, new contracts awarded to the company amounted to a total of HK$1950mn. As a result, company recorded a historical high for its contracts on hand of HK$3406mn, representing an increase of 59% YoY. Among which, HK$900mn would be recognized by the end of 2022; HK$1,328mn would be recognized in 2023 and the rest of HK$1,178mn would be recognized in 2024 and beyond.

Investment Thesis

With the Municipal Solid Waste (MSW) Charging Scheme scheduled to be launched in the second half of 2023, it is expected to further motivate the public to recycle and to increase the recycling volume. With the implementation of the Producer Responsibility Scheme on Plastic Beverage Containers enshrining the principle of “polluter pays” and the vision of “eco-responsibility”, the recycling rate of plastic beverage containers is expected to have a significant increase. The two schemes are expected to directly drive the growth of Baguio's recycling business and create better returns. We expect FY2022E-FY2023E EPS to be HKD8.22 cents and HKD9.28 cents respectively, with PT of HKD0.67, implies a FY2022E P/E of 8.2x (~2-yrs historical average). Our investment rating is “Buy”.

Risk factors

1) Market competition intensifies; 2) Soaring in operating cost; and 3) Unexpected slowdown in service demand.

Financial

Click Here for PDF format...