Dongguan research: waste incineration power generation+smart parking business

We recently visited the company's executives in Dongguan, visited the company's local waste incineration power plant, and learned about the operation of the smart parking business on the ground. After this investigation, we made the following judgment: (1) Our core business, waste incineration power generation, will develop steadily.

As a result of fewer construction/planned projects, construction revenue with lower profit margins fell as a result, but the company's profit margin rebounded. Furthermore, capital expenditure is expected to decrease in the future, which will help the company increase its dividend ratio. (2) The resumption of industrial and commercial activity in the first quarter of this year can support the increase in garbage disposal volume. (3) The company accelerates diversified development, expands revenue sources, and strives to expand asset-light businesses other than waste incineration power generation, such as smart city management services (including smart parking), environmental sanitation services, industrial solid/hazardous waste treatment, and landfill remediation. (4) The target revenue share of the smart parking business is to reach 10.0% within the next 3 to 5 years (note: smart parking and other asset-light revenue accounted for 2.8% in 2022, amounting to HK$230 million).

Blue ocean market for smart parking business

The smart parking business is one of the comprehensive smart city management services. Based on the relationships established by the waste incineration power generation business, the company cooperates with local governments/enterprises using (1) BOT model (the term period is about 8-15 years), (2) a commissioned operation model, or (3) a joint venture model to collect parking fees from car owners and obtain a share thereof. The company established an intelligent parking data management system and monitored parking space usage in real time through intelligent inspection vehicles and underground wireless geomagnetic sensors. The entire operation has many advantages: (1) ensuring the smooth arrival of car owners; (2) accurate parking charges; (3) easing peak queuing and eliminating fraud and corruption; (4) improving parking space utilization and solving the problem of resource waste; and (5) providing decision support for static traffic planning through big data analysis.

According to industry data, the average annual growth rates of intelligent road parking areas and the number of parking spaces operated nationwide in 2016-20 were 31.7% and 34.2% respectively. As of November 2020, the intelligent parking operation project covered 283 cities and counties across the country, involving 920,000 fee-paying parking spaces. The company expects the number of marketable berths nationwide to reach 9.2 million. In other words, the number of marketed berths will only reach 10.0%, which has huge potential for growth.

Profit growth in the smart parking business can be expected

In 2022, the company has participated in smart parking services in Guangdong, Hebei and Anhui provinces, covering more than 45,000 parking spaces. Based on the company's 10% revenue target, we don't rule out the possibility that the smart parking business profit could reach 100 million yuan within the next 5 years.

Reiterate the “buy” rating

We maintain our waste incineration power generation operation forecast. We expect waste disposal volume to increase 13.1% and 7.2% year-on-year respectively to 15,832 and 16,967 kilotons in 2023-24. Electricity sales during the same period will rise 15.3% and 10.4%, respectively, to 5.22 million and 5.77 million megawatt-hours.

After updating last year's cash flow figures, we all slightly raised our 2023-24 shareholder net profit forecast by 0.2%. We reaffirm the target price of HK$5.10, which corresponds to 7.5 times the target price-earnings ratio for 2023 and 25.0% room for growth. The “buy” rating remains unchanged.

Risk warning: (1) project development delays; (2) accounts receivable risk; (3) grid-connected electricity prices have dropped sharply.