Lower the net profit forecast to the mother to maintain the “buy” rating

Shanghai Environment achieved operating income/net profit of 6.29/52 billion yuan in 2022, down 13%/27% from the previous year. The net profit of Guimu was 18% lower than Huatai's expectations (630 billion yuan). 22Q4 achieved operating income/net profit of 22.3/065 million yuan, +19%/-24% year on year. According to the progress of BOT project operation, we have raised the management/financial expense ratio forecast. The estimated net profit for 23-25 will be 5.9/6.8/790 million yuan (previous value of 75/ 88/100 million yuan), and the corresponding EPS is 0.53/0.61/0.71 yuan. Referring to the comparable company Wind's average PE value of 14.3x in '23, considering the company's leading solid waste treatment in Shanghai, the project in hand was of excellent quality, and the company was given a target PE of 21.5x in '23, with a corresponding target price of 11.40 yuan (previous value of 11.91 yuan, based on 20.9xPE in '22), maintaining the “buy” rating.

Revenue fell 13% due to a decline in the size of BOT under construction, and increased costs due to new project operation and a decrease in the size of the BOT under construction caused the company's revenue to fall 13% in 2022, but the growth in solid waste operation business stabilized gross profit of 1.66 billion yuan (yoy -1%) for the whole year. Based on the calculation of the gross profit margin of BOT under construction of 8%, the company's gross profit share of BOT under construction fell from 9.5% in 2021 to 2.0% in 2022. In terms of expenses, the annual sales/R&D expenses ratio remained at 0.1%/1.6%; management expenses were +22% to 400 million yuan over the same period, mainly due to the increase in personnel due to the operation of new projects; financial expenses increased by +24% to 390 million yuan over the same period, mainly due to the cost of interest expenses after the new project was put into operation; the increase in expenses put pressure on the company's net profit to return to its mother. Looking ahead, we believe that the peak of the company's new project implementation has passed, and the increase in operating scale and efficiency is expected to drive performance back to the growth trend.

Solid waste operating revenue increased 20% year-on-year. Looking at the enhanced attributes of high-quality operators by sector, the company's solid waste treatment/sewage treatment/contracting and design revenue in 2022 was 39.9/5.3/1.32 billion yuan respectively, -20%/-13%/+21% over the same period last year. In the solid waste treatment business, the revenue of solid waste operation/BOT under construction was about 35.8/41 billion yuan, +20%/-80% over the same period last year. BOT under construction accounted for -22pp to 6% of total revenue in 2022, and the company's high-quality operator attributes were strengthened. We expect operating revenue to increase 17%/7%/3% year-on-year in 23-25, and the share of operating revenue will continue to increase.

The amount of feed-in electricity increased 19% year on year. By the end of 2022, the company operated 27 domestic waste incineration projects, including 13.98 million tons of factory waste, an increase of 10% over the previous year (including the commissioned operation of Laogang Phase I and Phase II). The feed-in capacity was 4.93 billion kilowatts, an increase of 19% over the previous year. The increase was largely due to the operation of Jinhua, Jinzhong, Fengxian II and Xinchang projects. With “Environmental Treatment+” as its strategic vision, the company provides comprehensive, full-process customized services in the environmental field. In 2022, the company successfully expanded agricultural and animal husbandry solid waste projects in Lanling County, completed more than 60 site surveys and environmental restoration projects, and signed 191 new technical service contracts.

Risk warning: Waste incineration project operation risks, rising operating costs of waste incineration and sewage treatment, and “environmental treatment+” business expansion falling short of expectations.