Profits of associated companies declined. After deducting the profits of the associated companies, the steady increase in business continued to operate, and Conch Venture achieved net profit attributable to the parent company of 3.85 billion yuan in 2022. After deducting non-continuing operations, -44.2% compared to the previous year, in line with the performance forecast guidelines (March 21 forecast a year-on-year decline of no more than 45%).
Profit of associated companies accounted for -52.3% year on year to $2.94 billion; after deducting the associated company's profit, continuing operations increased +22.5% year-on-year to $915 million, maintaining steady growth. Taking into account higher revenue from the garbage disposal business (to reflect the contribution of mergers and acquisitions in 2022) but lower profit contributions from associated companies, we lowered the company's 2023/2024 EPS forecast by 20.2/23.6% to $2.88/3.09, respectively, the 2025 EPS forecast $3.13, and the target price by 9.2% to HK$23.8, based on the segmented valuation method. We believe that the current stock price has fully reflected the expectations of a slowdown in the development of the waste-to-energy business. Considering the company's sufficient project reserves, we believe that the main business still has room for steady growth, and that the dismantling of new energy materials and lithium batteries is nurturing new growth poles for the company. Keep “buying.”
Waste disposal: Complete the project expansion target ahead of schedule, further improving the quality of revenue. The company achieved garbage disposal business revenue of 6.56 billion yuan in 2022, +14.2% year on year, of which operating revenue was 2.68 billion yuan, +113.3% year on year, accounting for 40.8% (2021:21.8%). Thanks to improved revenue quality, gross profit margin in 2022 was 27.5%, +3.7 percentage points year over year. Through active project development, the company completed mergers and acquisitions of 11 waste-to-energy projects with Jinjiang Environmental Protection and Agile Environmental Protection in 2022; at the same time, it signed 15 waste-to-energy projects, signed a total of 113 garbage disposal projects (including mergers and acquisitions), with a contracted disposal volume of 20.32 million tons/year, reaching the company's target of signing 18 million tons in 2023 ahead of schedule.
New energy materials: Cathode materials were put into operation, and construction of anode material projects was stepped up. Starting in 2022, the company accelerated investment in the field of new energy materials, and completed the construction and operation of the 50,000 tons/year lithium iron phosphate project within 7 months. Since it was put into operation in October 2022, more than 40 customers have tested it. With the completion of customer certification, we expect the company to gradually reflect the advantages of lithium iron phosphate projects in: 1) more advanced latecomer advantages in process and equipment; 2) lightweight advantages in raw material procurement; and 3) operation management and cost control. The company's anode materials project integrates the graphite chemical process and is expected to enjoy relatively lower feed-in tariffs in Sichuan, which is quite competitive. Currently, the anode material project is still under construction and is expected to be put into operation in the first half of 2023.
Lithium battery recycling: Efficient dismantling technology ushered in industrial market opportunities Thanks to the company's process technology for collaborative disposal in cement kilns, the company has efficient and unique technical advantages in the lithium battery dismantling process. In the future, as the generation of used lithium batteries enters a peak period, this technology is expected to usher in strong market opportunities in terms of industrialization. The company completed the construction of the pilot project in Wuhu in 2022 and began laying out recycling and dismantling projects in key regions. The industrialization process has already been accelerated.
Risk warning: The progress of the project fell short of expectations; the electricity price subsidy came later than we expected.