The hazardous waste disposal and resource recycling sector is driving the company's performance growth. The clean energy sector performance is yet to be released. The company's 1H23 achieved revenue/net profit of 93.54/748 billion yuan, compared to +19.86%/+13.94%, corresponding to 2Q23, the company's revenue/net profit ratio of +17.77%/+0.70% to 4714.254 billion yuan.
The year-on-year increase in the company's 1H23 performance was mainly due to increased sales volume in the harmless hazardous waste treatment and renewable resource recycling business, which led to +21.36% of this sector's revenue over the same period. Reserve orders in the clean energy equipment sector, that is, nuclear power and hydropower equipment, are quite plentiful, but revenue is still yet to be released. We expect the company's net profit to be 19.21/23 billion yuan from 2023-2025. Referring to comparable company Wind, the average value of 23E PE was 13.8x, giving the company 13.8 x 23E PE. The target price was 4.98 yuan (previous value: 5.15 yuan), maintaining the “buy” rating.
1H23 hazardous waste disposal and resource utilization revenue was +21.36%, but gross margin declined slightly by 1H23. The company's clean energy equipment/oil extraction/hazardous waste disposal and resource products revenue was -3.07%/-37.30%/+21.36% to 3.73/0.095/8.947 billion yuan. The gross margin was +0.5/-30.93/-2.56pp to 38%/-6.96%/13.23%, respectively. The oil extraction business accounts for less than 1% of the company's revenue, which has little impact on overall performance. On 1H23, the net profit of the subsidiaries Zhefu Hydropower/Huadu Nuclear Equipment/Shenlian Environmental Protection was 0.333/0.24/681 million yuan respectively. Of these, the net profit of Shenlian Environmental Protection accounted for 90.4% of the company's overall net profit. 1H23's net operating cash flow was +766.91% year-on-year to 330 million yuan, mainly affected by an increase in sales repayments received and a year-on-year increase in net income and expenditure of hedging security deposits.
The front-end of hazardous waste recycling is under construction and production capacity is sufficient, and orders for clean energy equipment can be expected to be released. The company has sufficient production capacity in the front-end of construction, mainly in Chenzhou, Hunan (370,000 tons, which obtained EIA and land certificates in April 2020), Dalian, Liaoning (300,000 tons, which obtained EIA and land certificates in May 2021), and Deyang, Sichuan (300,000 tons, under development, has not yet obtained an EIA), totaling 970,000 tons/year. If it is fully put into production, it will bring the company a flexible capacity increase of 57%. In terms of clean energy equipment, Huadu currently has the only “Hualong 1” nuclear power technology that has passed the three-generation standard seismic test and satisfies 60 years of service life. Orders are abundant; the company cooperates with the Three Gorges Group and others to build a production capacity of 10 sets of hydropower equipment per year. In the context of the construction of new power systems, pumped storage is booming and nuclear power construction is accelerating. We believe that the company's clean energy equipment orders can be expected to grow and be released.
The target price is 4.98 yuan, maintaining the “buy” rating
We expect the company's net profit to be 19.21/23 billion yuan from 2023-2025, corresponding to EPS of 0.36/0.40/0.44 yuan. We will give the company 13.8 x 23E PE, target price of 4.98 yuan, and maintain the “buy” rating.
Risk warning: The recovery in the volume and price of hazardous waste fell short of expectations; inventory and goodwill depreciated; the nuclear power/pumped storage construction cycle was lagging behind; the clean energy equipment competition pattern worsened, and company orders or profits fell short of expectations.