Key points of investment

Incidents: In 2022, the company achieved revenue of 4,567 million yuan, a decrease of 9.69%; net profit of 745 million yuan, an increase of 6.73%; net profit of non-return mothers was 733 million yuan, an increase of 6.78%; the weighted average ROE decreased 0.42 pct to 10.64% year-on-year, slightly lower than previous expectations.

Operating revenue continued to grow in 2022, and the net profit of the mother increased 6.73% to $745 million. The company's comprehensive gross profit margin in 2022 was 34.38%, an increase of 0.14pct over the previous year, and the net profit margin of the mother was 16.31%, an increase of 2.51 pct over the previous year, mainly due to an increase in the share of operating revenue. By business, 1) Solid waste operation: achieved revenue of 2,820 billion yuan, an increase of 7.66%, a gross profit margin of 50.70%, and a decrease of 8.59 pct.

2) PPP construction: Achieved revenue of 1,747 billion yuan, a decrease of 28.01%, mainly due to a decrease in the number and scale of projects under construction. The gross profit margin was 8.07%, an increase of 0.28 pct.

The steam supply has doubled, and the diversification of project revenue is beginning to bear fruit. By the end of 2022, the company had put into operation 32 waste incineration projects and 5 projects under construction. The operating project waste treatment capacity reached 35,000 tons/day, with an installed capacity of 724.5 MW, ranking among the highest in the industry. In 2022, the company disposed of 11.3978 million tons of household waste, an increase of 8.16%, electricity generation of 4.239 billion kilowatts, an increase of 5.04%, and feed-in electricity volume of 3.481 billion kilowatts, an increase of 4.56%. The expansion of the steam supply business has achieved remarkable results, reaching 301,800 tons of steam supply in 2022, an increase of 116.34% over the same period. The amount of waste-to-energy generated per ton in 2022 was 372 kilowatts/ton, a decrease of 2.89%, and the same decrease of 3.33% per ton was 305 kilowatts per ton, which was affected by the increase in steam supply.

The construction of the project is progressing in an orderly manner, and the new volume of operations is expected to reach 5,400 tons/day in 2023. The Enshi project was successfully completed and put into operation in 2022, adding 1,200 tons/day of production capacity. The Huizhou three-in-one project and the Jizhou and Ninghe food waste projects were put into operation during the year. By the end of 2022, the Huludao Waste-to-energy Project and the Shuozhou Project were close to completion. According to the company's operating plan, it will ensure that the Shuozhou Project, the Huludao Power Generation Project, the Wuhan Phase II Project, the Jingxi Project, and the Zhangqiu Phase II project are put into operation as scheduled within 2023, with an estimated additional capacity of 5,400 tons/day throughout the year.

At the end of 2022, the national subsidy repayment was 535 million yuan, and net operating cash flow improved significantly. The company's net operating cash flow in 2022 was 1,210 million yuan, an increase of 134.91% over the previous year, mainly due to the receipt of 535 million yuan in national subsidies at the end of December 2022, and an increase of 515 million yuan in national compensation payments in 2022 over the same period of the previous year.

Steady growth in scale & improved cash flow, collaborative expansion & outbound mergers and acquisitions provided incremental volume. Rigid expansion of the waste incineration industry, rationalization of business models & improvement of cash flow. The company's internal and external efforts helped the production capacity continue to rise. In 2015-2022, the company's waste incineration operation capacity increased by 29%. By the end of 2022, the company had an on-hand production capacity of 55,000 tons/day, of which 35,000 tons/day had been put into operation, with a ratio of 55% under construction/construction. The company is promoting ongoing project construction & outsourcing mergers and acquisitions. It is expected that 2023 will usher in a new round of production peaks and sign an acquisition framework agreement. The project involved an investment scale of 4,500 tons/day.

Profit forecast and investment rating: Based on construction progress and expansion plans, we lowered net profit to the mother in 2023-2024 from $1,103/1,238 million to $865/993 million, and estimated net profit of $1,109 million in 2025. In 2023-2025, net profit attributable to the mother increased by 16%/14%/13%. EPS was 0.62/0.71/0.80 yuan. The current market value corresponds to PE 12/11/9 times, maintaining the “buy” rating.

Risk warning: Project progress falls short of expectations, policy risks, financial risks, and industry competition intensifies.