The 1H23 performance was slightly better than expected. After deducting joint venture revenue, the core profit stabilized, and Conch Venture posted 1H23 results, achieving net profit attributable to the parent company of 1.82 billion yuan, -25.2% year-on-year, slightly better than market expectations (Visible Alpha's unanimous expectation: 1.72 billion yuan). Profit attributable to associated companies was 1.27 billion yuan, -32.7% year-on-year. After deducting its impact, the core net profit was 550 million yuan, +1.2% year on year.
As the pace of implementation of waste disposal projects accelerates and the quality of project operations continues to improve, we expect 2H23's core profit growth to accelerate; however, due to supply and demand challenges in the cement industry, profit recovery for associated companies may become more obvious from 2024. We lowered the 2023/2024/2025 EPS by 27.6%/10.0%/10.4% to $2.08/2.78/2.80. Combined with the impact of changes in the Hong Kong dollar exchange rate, we lowered the target price by 29.4% to HK$16.8, based on the segmental valuation method. Maintain a “buy” rating.
Garbage disposal: Disposal volume has been greatly increased, and the quality of operation has continued to be optimized, and the performance of improving the quality and efficiency of the garbage disposal business is outstanding. The 1H23 waste-to-energy project received and transported +35.4% year-on-year to 7.6 million tons, and the disposal volume was 6.6 million tons, +39.0% year-on-year. Benefiting from a significant increase in collection, transportation and disposal volume, the operating revenue of the garbage disposal business was +40.6% year-on-year to 1.7 billion yuan, accounting for 50% of the total revenue of the sector, and its share continued to increase (1H22/2H22:39.5%/40.1%). We expect the company to complete construction and operation of 4,500 tons/day waste-to-energy projects in 2H23 (1H23:2000 tons/day of construction and operation+1,600 tons/day acquisition project). Combined with the optimization of the operating quality of the inventory project, we expect the garbage disposal business to maintain rapid growth in 2H23.
There are still supply and demand challenges in the cement industry. Since the profits of affiliated companies may be gradually restored from 2024 to 2Q23, due to insufficient demand, it is still difficult for the current false peak production execution to effectively match supply and demand, and cement prices have dropped significantly. With the clear tone of steady growth and the gradual implementation of countercyclical adjustment policies, we expect the demand side to gradually usher in marginal improvements. However, considering that it will take time for the policy to spread and be effective, we expect that supply and demand challenges in the 2H23 industry may still exist. After a sharp drop in cement prices in the off-season, the intensity of restoration during the peak season may be relatively moderate. Demand side improvements are expected to be even more significant in 2024, leading to a more sustainable recovery in cement prices and affiliate earnings.
Accelerate the deployment of the new energy industry
The company's new energy industry layout has been further improved, and it continues to accumulate momentum for new growth points. By the end of 1H23, the company had signed a contract for a 135,000 tons/year project in the field of lithium battery recycling, and the first project is expected to be put into operation by the end of 2023. We believe that the company has a strong cost advantage by using waste heat from cement kilns to efficiently disassemble and recycle lithium batteries, and is expected to develop rapidly during the market growth period. In the first half of the year, cathode materials were still in the product certification cycle, and their contribution to actual revenue was limited. Focus on the driving effect of some key customers on the overall production and sales of related businesses after completing certification breakthroughs.
Risk warning: The progress of the project fell short of expectations; the electricity price subsidy came later than we expected.