1H23 performance is basically in line with our expectations.

Overseas Chinese Bank Co., Ltd. announced 1H23 results: the company achieved operating income of 2 billion yuan, year-on-year + 4.4%; return to the mother net profit of 200 million yuan, + 27.9%; deduction of non-return net profit of 170 million yuan, + 9.5%, basically in line with our expectations.

Trend of development

In-hand orders are firmly in the forefront of the industry, and business income is growing steadily. The company has gradually shifted from the pursuit of scale to the control of project quality. The operating income of 1H23 urban and rural sanitation and cleaning business is 1.92 billion yuan, + 3.8% compared with the same period last year. 1H23 company added a total of 2.06 billion yuan in winning bids, with an annualized amount of 420 million yuan; in August 2023, the company won the new bid for the Langfang project in Hebei, with a total amount of 3.33 billion yuan and an annualized amount of 540 million yuan so far. The investment income generated by the disposal of long-term equity investment in 1H23's non-recurrent profit and loss is 30 million yuan, mainly for the equity transfer of Xiangtan parking project.

Fine management and control brings effective cost reduction, 1H23 gross profit margin, net profit margin year-on-year + 1.4ppt, + 1.8ppt.

1H23's comprehensive gross profit margin of 26.2%, year-on-year + 1.4ppt, is mainly due to the continued mechanization and digital transformation, and the car-to-passenger ratio continues to rise. 1H23 company period expense rate 13.4%, year-on-year-0.8ppt, in which management expense rate year-on-year-2.3ppt to 6.9%, mainly due to the optimization of internal organizational structure and the reduction of salary due to the streamlining of managers.

The fixed increase of no more than 1.2 billion yuan was approved by the Shenzhen Stock Exchange, helping to improve the mechanization rate of sanitation and optimize the capital structure. The company plans to use 64% (764 million yuan) and 6% (76 million yuan) of funds for the "city butler" equipment centralized configuration center project and smart city management digital project respectively, matching the trend of mechanization, electrification and intelligence of the industry. 30% (360 million yuan) is proposed to be used to supplement working capital and repay loans. When the government returns slowly, the company has greater financial pressure. 1H23's asset-liability ratio is 68.9%, year-on-year + 2.3ppt; financial expense rate is from + 1.4ppt to 4.7%; operating cash flow is-180 million yuan, year-on-year-225.4%. We expect the completion of fixed increase, the disposal of stock solid waste projects, and the improvement of accounts receivable to help ease the company's financial pressure, reduce the financial expense rate, and support business development.

Profit forecast and valuation

We keep the 2023 profit forecast unchanged and introduce the 2024 profit forecast of 450 million yuan for the first time. The current share price corresponds to 13.6 times 2023 earnings and 11.4 times 2024 earnings. Keep the outperforming industry rating and target price unchanged, corresponding to 14.2 times 2023 price-to-earnings ratio and 11.9 times 2024 price-to-earnings ratio, with 3.9% upside compared to current stock prices.

Risk

The growth rate of orders was lower than expected, and the rate of government payback was slower than expected.