Positioning Henan Environmental Technology Group to maintain a “buy” rating
Backed by Henan Investment Group, Chengfa Environmental is actively promoting the construction of solid waste treatment assets. The company achieved operating income of 2,754 million yuan in the first half of the year, +27.4% year on year, and net profit of 582 million yuan, +24.5% year on year. Profit increased steadily. Among them, environmental protection business revenue accounted for more than half. We raised the forecast for garbage storage volume, tons of feed-in electricity, and gross margin of waste incineration operations. It is estimated that the company's net profit returned to the mother in 22-24 was 12.52/13.37/1,420 billion yuan (previous value: 11.09/11.97/1,230 million yuan), of which the net profit of solid waste treatment/highway returned to the mother in '22 was 775/477 million yuan. Referring to the solid waste treatment/highway comparison company 2022 Wind, the average PE value was 10.0x/7.8x, considering that the waste incineration market in Henan Province was becoming saturated, outside the province and overseas There is some uncertainty about project expansion. Solid waste treatment/expressway 2022 PE 8.0x/7.8x was given, corresponding target price of 15.45 yuan (previous value 14.05 yuan), corresponding to 2022 PE 7.9x, maintaining the “buy” rating.
The absorption and merger of Enlightenment Environment was terminated, and a number of solid waste assets were successfully acquired. In July 2022, Chengfa Environment and Enlightenment Environment terminated major asset restructuring. As of June 30, 2022, the company had completed the acquisition of 9 zero-carbon waste incineration projects in Zhengzhou (with a total production capacity of 7,900 tons/day) and 5 medical hazardous waste companies owned by Wuhan Enlightenment Ecology. Chengfa Investment (a holding subsidiary of Henan Investment Group) acquired 8 waste incineration projects (with a total production capacity of 6,400 tons/day) and 4 medical waste companies from Enlightenment, giving priority to the transfer of opportunities to Chengfa Environment. We believe that the expansion of solid waste asset production capacity will provide a strong guarantee for the growth of the company's performance.
Expressway revenue declined in the short term, and waste-to-energy production capacity increased rapidly, and traffic fell, leading to highway revenue of -7.7% year-on-year to 674 million yuan in the first half of the year, but the decline was far lower than the overall decline in highway traffic in Henan Province (-37.3% compared to the same period). Xu Pingnan's “external drainage and internal excavation” had impressive results. The company completed 1,045 million kilowatt-hours of feed-in electricity in the first half of the year, an increase of 592.48% over the previous year. According to company announcements and project construction progress estimates, as of June 30, 2022, the company is operating 24 domestic waste power generation projects, with a treatment scale of 22,450 tons/day, and a built/reserve project scale of 6,700/5,050 tons/day. Considering potential asset injections of 6,400 tons/day, the company's potential on-hand production capacity reached 40,600 tons/day, ranking among the industry's leading positions.
There is significant room for improvement in operational efficiency, which is expected to contribute to increased performance
The company's garbage feed-in electricity volume in the first half of the year was 261 degrees, which is 16.6% lower than the average value of typical companies in the industry (313 degrees/ton). We think it is mainly due to 1) insufficient garbage volume of newly put into operation; 2) low garbage heat value in counties and rural areas; 3) low feed-in capacity per ton of acquired projects. As the amount of garbage stored in the new project climbed, the supporting collection and transportation system was gradually improved, and the quality and efficiency of the original Enlightenment project improved, we think there is significant room for improvement in the company's operating efficiency. It is estimated that the amount of feed-in power in 22-24 will be 269/278/287 kilowatt-hours/ton, which is expected to contribute to the increase in performance.
Risk warning: The progress of the project fell short of expectations, and tons of feed-in power fell short of expectations.