Key points of investment
Incident: Conch Environmental revealed its 2022 results: revenue increased 1.9% year over year to 1.73 billion yuan; Guimu's net profit fell 43.2% year over year to 330 million yuan. Looking at H2 alone, revenue fell 10.1% yoy to 82.489 million yuan; gross profit fell 25.8% yoy to 4.2 billion yuan; and Guimu's net profit fell 76.1% yoy to 82.489 million yuan.
Comment: The epidemic was repeated again in the second half of 2022, affecting the commencement of construction of waste production units. The year-on-year growth rate of industrial value added began in October and continued to slow again. Waste production was insufficient, and the prosperity of the hazardous waste disposal industry bottomed out. The net profit of conch environmental protection was clearly damaged, falling 68.1% month-on-month.
1) Industrial solid waste added polluted soil business, while competition in soil remediation business was fierce, lowering the unit price of industrial solid waste disposal ton. In the second half of the year, gross profit per ton fell 85 yuan to 80 yuan. Revenue remained basically unchanged throughout the year, and gross profit fell 11.7% year-on-year.
2) The boom has bottomed out, market competition is fierce. The unit price for disposal of general industrial hazardous waste continued to fall by 186 yuan to 1,283 yuan month-on-month in the second half of the year. The company made every effort to expand new customers and make up for the price with volume. Disposal volume in the second half of the year increased 29.2% month-on-month to 437,000 tons, the annual volume increased 24.5%, and annual revenue increased slightly 0.6% year-on-year to 1.06 billion yuan. In the second half of the year, the gross profit of industrial hazardous waste tons fell 147 yuan month-on-month to 709 yuan, and the annual gross profit of tons fell 330 yuan to 773 yuan year-on-year. The decline in gross profit per ton is mainly due to falling unit prices per ton and cement companies in Shandong, Henan and other places increasing production peaks, affecting capacity utilization.
3) The oil and gas field extraction volume of waste production units was reduced in stages, and the annual disposal volume of the oil sludge business was -11.4% compared to the same period last year.
4) In the fly ash business, the production capacity optimization of the Wuhu project in the first half of the year affected inbound volume. Disposal volume increased 12.9% month-on-month to 25,000 tons in the second half of the year, and annual disposal volume fell 6.5% to 48,000 tons year on year. In the second half of the year, disposal costs of fly ash tons fell 901 yuan month-on-month to 673 yuan, and gross profit per ton recovered to 511 yuan.
The company converted the original industrial hazardous waste project with an annual production capacity of 100,000 tons into a comprehensive resource utilization business. The annual sales volume of comprehensive resource utilization products was 7115 tons, accounting for 1.4% of revenue.
The epidemic affected the commissioning and contract progress of production capacity. Production capacity of 1.16 million tons was newly put into operation throughout the year, and 1.8 million tons of new production capacity were signed.
The company is still in the process of receiving volume, and expenses are increasing. Annual ton management expenses increased 24.0 yuan to 126.1 yuan, ton sales expenses increased 3.5 yuan to 62.4 yuan year over year, and ton financial expenses increased 13.1 yuan to 36.5 yuan over the same period last year.
Cash flow is slightly under pressure. During the pandemic, the company relaxed customer credit periods, the number of accounts receivable turnover days increased by 63 to 285 days year on year, and operating cash flow in 2022 fell 29.3% year on year to 540 million yuan. During the period, the company added 320 million yuan in bank loans and 270 million yuan in book cash at the end of the period.
Our view: The company adheres to the 2028 30 million ton plan, and will comprehensively make up for shortcomings and improve the business layout in 2023. 1) In terms of hazardous industrial waste, considering the impact of cement production, the company will carefully lay out traditional disposal projects to improve capacity utilization while entering comprehensive resource utilization; 2) In terms of industrial solid waste, it will continue to dig deeper into the sludge disposal market, prioritize the Yangtze River Delta, Beijing-Tianjin-Hebei and other regions, and strengthen cooperation with large water treatment enterprises to promote “sewage+sludge” projects. At the same time, it will also research and develop solid waste alternative fuel projects.
Dongjiang Environmental Protection, a leader in traditional harmless disposal, expects to lose 43-501 million yuan in 2022. Competitors are weak, and the hazardous waste disposal market boom has bottomed out. We are still optimistic that collaborative disposal in cement kilns will quickly replace traditional disposal. Conch Environmental Protection is still in a period of rapid growth where projects and production capacity are released, entering the harvest period after the “Happy Horse Rodeo”. The company is investigating gaps and filling gaps, making multiple layouts, improving the business layout, and seeking a balance in the utilization rate of production capacity. Considering the increase in the breadth and intensity of the company's business investment and the increasing pressure on the cost rate, we raised the company's revenue forecast growth rate and adjusted the net profit forecast for the company. The company's revenue for 23/24/25 is estimated to be 23.6/32.6/422 billion, +36.5%/+38.3%/+29.2% year-on-year respectively, and the net profit of Homo is 4.1/5.9/730 million, respectively +25.8%/+42.1%/+23.3%, maintaining the “buy” rating, with a target price of HK$340.
Risk warning: The epidemic has repeatedly affected enterprise production and waste, cross-provincial transportation, engineering construction falling short of expectations, repayment falling short of expectations, increased market competition, and potential environmental risks.