Core views

By 2023H, the company achieved revenue of 3.24 billion yuan, an increase of 17.5% over the previous year, mainly due to the commissioning of waste incineration projects under construction and the expansion of business scale; realized net profit of 594 million yuan, an increase of 2.09% over the previous year. The profit growth rate fell short of revenue, mainly due to a decline in gross margin in the environmental protection engineering business and a failure to recover high-speed traffic as expected. By 2023H, the company's waste incineration production scale will reach 26,450 tons/day, and the construction scale is 2,100 tons/day. We believe that the company has reached the end of the peak of incineration capital expenditure. Subsequently, with the gradual increase in the capacity utilization rate of incineration projects, the company's profitability and cash flow situation are expected to improve. The company's net profit from 2023 to 2025 is estimated to be 1,291 billion yuan, 1,471 billion yuan, and 1,548 billion yuan respectively, maintaining the “buy” rating.

occurrences

The company released its 2023 semi-annual report

By 2023H, the company achieved operating income of 3,236 million yuan, an increase of 17.50% over the previous year; net profit of 594 million yuan, an increase of 2.09%; net profit of non-return net profit of 586 million yuan, an increase of 6.47% over the previous year.

Brief review

The scale of business is expanding rapidly and profits are growing steadily

The company is a leading waste incineration company in Henan Province. Currently, its main business includes environmental protection business and highway business. By 2023H, the company achieved operating income of 3.36 billion yuan, an increase of 17.50% over the previous year; generated operating costs of 1,918 million yuan, an increase of 22.09%; and achieved net profit of 593 million yuan, an increase of 2.09% over the previous year. In 2023H, the company's sales rate, management rate, and financial rate were 0.35%, 5.26%, and 8.22%, respectively. The year-on-year changes were +0.05ppt, +1.32ppt, and +1.36ppt. Among them, the increase in the management expense rate was mainly due to the increase in the company's business scale. By business, 2023H environmental protection, expressways and other businesses achieved revenue of 2,316 million yuan, 720 million yuan, and 200 million yuan respectively, with year-on-year changes of +25.74%, +6.02%, and -14.17%, accounting for 71%, 22%, and 6% of total revenue, respectively. As projects under construction continued to be put into operation, the company's environmental protection business grew rapidly; the expressway business model was mature and stable, and the profit and cash flow situation was steady, moderate and positive after the pandemic. 2023H's net operating cash flow was 694 million yuan, an increase of 79.77% over the previous year.

The incineration business continues to gain strength, and multi-track contributions empower environmental protection

The company's environmental protection business can be divided into solid waste treatment, environmental protection solution integration business, and water treatment business. Among them, solid waste treatment is the core business. In 2023H, the solid waste treatment and sanitation business achieved revenue of 1,291 billion yuan, an increase of 39.20% over the previous year; achieved gross profit of 589 million yuan, a year-on-year decrease of 1.33%, and a gross margin of 45.62%.

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 in three years. In 2023H, the total order scale of the company's domestic waste incineration power generation sector was 28,550 tons/day. Among them, 30 projects have been operated, with a garbage disposal capacity of 26,450 tons/day; 2 new projects are under construction, with a scale of 2,100 tons/day. By 2023H, the company's domestic waste storage volume reached 4.8633 million tons, an increase of 21.50% over the previous year. The tonnes of power generation were 291 kilowatt-hours, and the tonnes of feed-in electricity were 247 kilowatt-hours. In addition to the bidding model, the company also obtains projects through acquisitions. Since 2023, incineration power generation projects have been put into operation in Huaiyang, Xixian, Kashi, Neihuang, etc., and the scale of waste incineration business has continued to expand. The company's acquisition of Beijing Xinyi is expected to further cultivate the competitive advantage of the solid waste treatment business, enhance comprehensive environmental management service capabilities, and achieve coordinated development of waste incineration and recycling and dismantling business.

In addition, the company is also actively expanding hazardous waste and sewage projects. 2023H has 5 hazardous waste disposal projects, with a total annual treatment scale of 279,500 tons.

Among them, 2 projects have been operated, with a total annual processing scale of 34,500 tons; 3 projects under construction, with a total annual processing scale of 245,000 tons. 2023H has operated 20 projects in the field of environmental health services, with an annual contract value of 270 million yuan. There are 2 projects under construction, with an annual contract amount of RMB 21.23 million. The sewage project treatment scale is 305,000 tons/day, and the sewage project treatment scale is 506,800 tons/day. 8 have been put into operation and 5 are under construction.

Road section advantages are remarkable, and high-speed profitability is expected to be restored

The company's high-speed business mainly includes toll fees and service area management and advertising. In 2023H, the company's expressway business achieved revenue of 720 million yuan, an increase of 6.02%; of these, high-speed tolls were 705 million yuan, up 3.6% year on year, accounting for 21.79% of current revenue; Henan Province is an important transportation hub in the country, with core road and bridge assets, the total mileage of the Xupingnan Expressway, accounting for 3.85% of the province's total expressway mileage. Its maintenance experience, road maintenance, and toll services have all reached the highest level in the industry. It is expected to bring continuous and steady cash flow to the company. In 2023H, the company's high-speed traffic recovery fell short of expectations, causing a certain drag on the company's performance growth. However, as China's economic resilience continues to show, high-speed business is expected to gradually return to pre-pandemic levels.

The cash flow situation is expected to continue to improve and maintain the “buy” rating

The company is preparing to issue convertible bonds to raise 2.3 billion dollars to build new waste incineration projects, hazardous waste disposal projects, sewage treatment projects and supplementary liquidity.

We judge that as the company overcomes the peak of capital expenditure, the incineration business continues to release production capacity, and compounded by the restoration of expressway operating efficiency, the company's cash flow situation is expected to continue to improve. We expect the company's operating income from 2023 to 2025 to be 6.645 billion yuan, 7.117 billion yuan, and 7.082 billion yuan respectively, corresponding attributable net profit of 1,291 billion yuan, 1,471 billion yuan, and 1,548 billion yuan respectively, and corresponding EPS of 2.01 yuan, 2.29 yuan, and 2.41 yuan respectively, maintaining the “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.