1H23 homologated net profit was -13% year-on-year, reaffirming the “buy” rating

Green Dynamics released its semi-annual report. In 2023, H1 achieved revenue of 2.142 billion yuan (yoy -5.35%), net profit of 364 million yuan (yoy -12.60%), minus non-net profit of 359 million yuan (yoy -13.26%). Among them, Q2 achieved revenue of 1.01 billion yuan (yoy -4.88%, qoq +5.80%) and net profit of 193 million yuan (yoy -17.90%, qoq +13.42%). We expect net profit to be RMB 805/9.11/1,003 million for 23-25 (previous value: RMB 839/958/1,043 million). For Green Dynamics H shares (1330 HK), we gave 8.1 times the predicted PE for 2023, and the corresponding target price was HK$5.05 (previous value: HK$4.87), confirming the “buy” rating. For Green Dynamics A shares (601330 CH), we gave 16.1 times the predicted PE for 2023, and the corresponding target price was RMB 9.34 (previous value:

RMB 8.58), reaffirming the “buy” rating.

Construction revenue declined, operating revenue +11% year on year

23H1 Revenue declined mainly due to a decline in construction revenue. The company's new construction projects have been put into operation one after another. The production capacity under construction is the 800 tons/day project in Jingxi. The number and scale of projects under construction declined. The revenue from the construction sector was RMB 642 million, down 28.1% from the previous year. Operating revenue increased 10.6% year-on-year to RMB 1,302 billion, mainly due to the addition of Huizhou 3-in-1, Enshi, Shuozhou, and Huludao waste-to-energy projects compared to the same period last year, and the inclusion of Fengcheng Company in the consolidated statement.

The amount of feed-in electricity is growing steadily, and the overall gross margin is expected to increase

Green Power 23H1 treated 6.3 million tons of household waste, an increase of 14.6% over the previous year, and completed 1.84 billion kilowatt-hours of feed-in electricity, an increase of 8.7% over the previous year. The overall gross margin fell by 0.06 percentage points to 35.95%. The main reason was the increase in fuel costs for some operating projects and the increase in accrued production safety expenses. Considering that the BOT construction service revenue ratio may decline to 30.3% (year 22:38.3%), we expect a comprehensive gross margin of 37.6% in '23 (year 22:34.4%). The company is actively expanding the food waste and heating business, which is expected to further diversify revenue and promote high-quality growth.

Investment in mergers and acquisitions and business development are beginning to bear fruit

In terms of investment and mergers and acquisitions, breakthroughs have been achieved in projects such as Lanzhou, Gansu. The company signed the “Equity Acquisition Framework Agreement” in February, basically completed on-site due diligence in the first half of the year, and signed a supplementary agreement in August. In terms of new business development, the company is actively planning and expanding low-carbon environmental protection industrial park projects. In May, it signed the “Jinan Zhangqiu Low-Carbon Environmental Protection Industrial Park Project Investment Cooperation Framework Agreement” with the People's Government of Zhangqiu District of Jinan City, and has already carried out preliminary work such as project development.

Risk warning: garbage disposal volume and feed-in electricity volume are lower than expected, gross margin of solid waste treatment is lower than expected, and the decline in construction revenue exceeds expectations.