Core views

In 2022, the company achieved operating income of 6.355 billion yuan, an increase of 12.56% over the previous year; net profit of 1,056 billion yuan, an increase of 9.09% over the previous year. The increase in the company's performance was mainly due to the growth of the environmental protection business. In the environmental protection sector, the company relied on self-construction and outsourcing to rapidly expand the scale of waste incineration production capacity. By the end of 2022, the garbage disposal capacity had reached 26,250 tons/day, and the solid waste operation business achieved revenue of 2,096 billion yuan in 2022, an increase of 189% over the previous year. In terms of expressway business, the expressways operated by the company have good location advantages and mature operating experience. However, in 2022, due to the impact of the epidemic and other factors, the average daily traffic flow of the company's expressways fell to 36,500, a year-on-year decrease of 27.11%. We expect road traffic to gradually resume after the adjustment of the epidemic prevention policy in '23. We expect the company's net profit from 2023 to 2025 to be 1,315 billion yuan, 1,491 billion yuan and 1,560 million yuan respectively, maintaining the “buy” rating.

occurrences

The company released its 2022 annual report

In 2022, the company achieved operating income of 6.355 billion yuan, a year-on-year increase of 12.56%; net profit of 1,056 billion yuan, an increase of 9.09%; net profit after deduction of 1,010 billion yuan, a year-on-year increase of 9.84%; and net income per share of 1.65 yuan, an increase of 0.14 yuan/share.

Brief review

A local asset operation platform in Henan Province, the high-speed environmental protection industry grew rapidly throughout 2022. The company achieved operating income of 6.355 billion yuan, an increase of 12.56% over the previous year; generated operating costs of 2,846 billion yuan, an increase of 3.39% over the previous year; and achieved net profit of 1,056 billion yuan, an increase of 9.09% over the previous year. The increase in the company's revenue and profit was mainly driven by the growth in the scale of the environmental protection business. In 2022, the company's sales rate, management fee rate, and financial rate were 0.48%, 5.98%, and 1.22% respectively, with year-on-year changes of +0.08ppt, +0.52ppt, and +1.03ppt.

The increase in the company's financial rates was mainly due to the transfer of projects under construction to operation and the conversion of interest capitalization to costs.

The company's main business currently includes environmental protection business and highway business. In 2022, environmental protection, expressways and other businesses achieved operating income of 4.49 billion yuan, 1,366 billion yuan, and 500 million yuan respectively, with year-on-year changes of +19.91%, -4.37%, and 5.41% of total revenue, accounting for 71%, 21%, and 8% of total revenue, respectively. The company's environmental protection business is growing rapidly, the expressway business model is mature and stable, and the profit and cash flow situation is steady, moderate and positive. The net operating cash flow in 2022 was 1,645 billion yuan, an increase of 29.23% over the previous year.

Self-built acquisitions were carried out in combination, and the incineration business expanded rapidly

The company's environmental protection business can be divided into solid waste treatment, integrated environmental protection solutions business and water treatment business. Among them, solid waste treatment is the core business, achieving revenue of 2,096 billion yuan in 2022, an increase of 189% over the previous year, accounting for 46.68% of the environmental business; achieving gross profit of 899 million yuan, an increase of 217.01% over the previous year, and a gross margin of 42.88%. Since 2019, the company has seized the policy opportunities of the Henan Intravenous Industrial Park and rapidly expanded the scale and capacity of waste incineration projects over three years. By the end of 2022, the total order volume of the company's ongoing orders for domestic waste incineration power generation was 30650 tons/day. Among them, 27 projects have been put into operation, 3 were put into operation in 2022, with a garbage disposal capacity of 26,250 tons/day; 5 new projects are under construction, with a scale of 4,400 tons/day. Of the 30650 tons/day of the company's current order, a total of 26850 tons/day is a non-competitive allocation project; in the non-competitive allocation project, all of the 8,200 tons/day subsidy funds are borne by the central government, and the rest is shared by the central government; 10,000 tons/day of 26850 tons/day (of which a total of 1000 tons/day in 2022) have been included in the national renewable energy subsidy list. In addition to self-construction, the company also uses acquisitions to open up market space in other regions of the country. Throughout 2022, the company has completed the acquisition of 9 waste incineration projects including the Zhengzhou Qidi Zero Carbon Company, with a total production capacity of 7,900 tons/day. The project area includes Shandong, Hebei, Anhui, Chongqing and other provinces and cities.

In 2022, the company's domestic waste storage volume reached 8.351 million tons, an increase of 200.69% over the previous year; the power generation capacity of tons was 303 kilowatt-hours, and the tonne feed-in capacity was 255 kilowatt-hours. The company currently has sufficient waste incineration production capacity, and its willingness and ability to expand through mergers and acquisitions is quite impressive. It is hoped that in the future, the scale of solid waste incineration performance will be further expanded through self-construction and commissioning and mergers and acquisitions.

In addition, the company is also actively expanding fields such as hazardous waste and water treatment, and is collaborating in multi-industry development. In 2022, the company had 5 hazardous waste treatment projects with a total annual treatment scale of 279,500 tons, of which 2 were already in operation, 2 under construction, and 1 in preparation; water supply projects with a treatment scale of 305,000 tons/day, all of which were put into operation; 6 sewage projects were put into operation, 1 under construction, and 5 in preparation.

The location advantage is remarkable. Economic recovery provides impetus for the continuous growth of the expressway business. The company's highway business mainly includes tolls and service area management and advertising. In 2022, the company's expressway business achieved revenue of 1,366 billion yuan, a year-on-year decrease of 4.37%; of these, highway tolls were 1,356 billion yuan, a year-on-year decrease of 4.03%, accounting for 99.26% of current revenue; and service area management and advertising business revenue of 1.07 million yuan, accounting for 0.74% of current revenue. In 2022, due to the impact of the epidemic control, highway traffic declined, causing the business to be under heavy pressure. The average daily traffic flow was 36,500, a year-on-year decrease of 27.11%. The difference in the lower revenue decline was mainly due to the impact of the external environment, where there were fewer buses compared to trucks, and truck tolls accounted for a relatively high share of revenue. Henan Province is an important transportation hub in the country. The company operates three highways. Among them, the core road and bridge asset, the Xuping South Expressway, has a total mileage of 255 kilometers, accounting for 3.85% of the province's total highway mileage. Its maintenance experience, road maintenance, and toll services have all reached the highest level of the industry, providing a stable cash flow for the company's subsequent development. In addition, in 2022, the “Yushang Expressway” service platform independently developed by the company was promoted throughout the province. The application of the “smart tunnel” control system reduced inspection volume by 20%, increased disposal efficiency by 30%, and improved quality and efficiency in various aspects. We expect that with the optimization and adjustment of epidemic prevention and control policies, the real economy will gradually heat up and recover, and highway traffic will return to normal, which has provided a great impetus for the company's expressway business to grow.

The two main industries of high-speed incineration complement each other, and expectations for high performance growth are improving

Overall, the company relies on the resource advantages of the Henan Provincial Department of Finance and works collaboratively in the two main businesses of expressways and waste incineration, and has good future expectations. Currently, the company's expressway business continues to produce stable cash flow and plays a role in protecting the investment and financing of the waste incineration business; the waste incineration business relies on existing sufficient incineration production capacity to continuously increase subsequent production, construction, mergers and acquisitions, and there is plenty of room for profit growth. We expect the company's net profit from 2023 to 2025 to be 1,315 billion yuan, 1,491 million yuan and 1,560 million yuan respectively, and EPS is 2.05 yuan/share, 2.32 yuan/share, and 2.43 yuan/share, respectively, giving it a “buy” rating.

Risk analysis

The risk that the company will receive new business orders that fall short of expectations: There is still uncertainty about how the company will obtain orders for waste incineration projects in the future, which may have an impact on the company's future performance growth.

Risk that the level of policy promotion and implementation falls short of expectations: The company's business development is clearly guided and driven by policy. If the degree of issuance, promotion, or implementation of relevant environmental protection policies falls short of expectations, there is a risk that the conditions for enterprise development will fall short of expectations.

Risk of declining financial disbursements for environmental protection management: Most environmental protection enterprises target the government's business model. If financial resources for environmental management decline, there is a risk that corporate orders will increase or product sales will decline accordingly, which will adversely affect the company's development.

Risk of fluctuations in expressway traffic: The company's high-speed traffic is affected by factors such as the regional economy, population size, number of social vehicles, and control policies, etc., and there is a risk that traffic will fall short of expectations.