Key points of investment
Incident: Everbright Environmental disclosed 23H1 results: revenue fell 24.0% year on year to HK$16.30 billion; net profit to parent fell 0.4% year on year to HK$2.78 billion. It is proposed to pay an interim dividend of HK14 cents per share, with a dividend ratio of 30.9%.
Comment: Operating revenue accounted for more than half. Operating revenue for the first half of the year was -0.3% year-on-year to HK$9.3 billion. Profit quality improved markedly. In the first half of the year, the company's revenue fell 24.0% year on year to HK$16.3 billion, mainly due to the continued decline in the scale of projects under construction and the decline in construction revenue. H1 construction revenue was -55.3% year-on-year to HK$4.1 billion. The company's EBITDA rate improved by 12.4ppt to 45.3% year-on-year.
(1) In the environmentally friendly energy sector, the amount of garbage disposal has increased steadily, and operating profit margins have improved. 23H1 operation/construction revenue was +0.5%/-61.8% yoy to HK$45/2.7 billion, EBITDA -3.7% yoy, EBITDA rate +15.4ppt to 51.8% yoy, and net profit -0.6% yoy.
——H1 domestic waste treatment volume was +8% year-on-year to 23.87 million tons, food waste and other waste treatment volume was +32% to 1.26 million tons, and tonnes of feed-in electricity was -19 degrees to 314 degrees. In the first half of the year, 17 new projects were signed, increasing the annual production capacity by 730,000 tons. The 5 new projects put into operation contributed 1.13 million tons of production capacity, and the production capacity under construction was 3.52 million tons.
——We combine priorities, actively promote business collaboration, expand heating business with more than 30 projects, and enhance project efficiency.
(2) In the environmental water sector, the share of operating revenue increased to 50%, and operation/construction revenue in the first half of the year was +6.1%/-33.9% to HK$16.1 billion; EBITDA was +20.8%, the EBITDA rate was +11.2ppt to 41.8% year on year, and net profit was +21.0%.
(3) In the green environmental protection sector, the cost of comprehensive biomass utilization has dropped significantly. H1 operation/construction revenue was -4.3%/-34.9% yoy to HK$32/500 million; EBITDA was -4.0% yoy, the EBITDA rate was +1.9ppt to 33.5% yoy, and net profit was -34.0% yoy.
By optimizing the debt structure and controlling capital costs, financial expenses fell by HK$50 million year-on-year in the first half of the year. Everbright Environment issued RMB 4 billion of medium-term notes to replace foreign currency debt in the first half of the year. Effective capital control costs fell to about 3.5%, down 0.1 ppt from 22H2. At the end of the period, interest-bearing liabilities decreased by HK$4 billion to HK$99.1 billion, and H1 financial expenses decreased by HK$50 million year on year. Cash on hand at the end of the period was HK$8.53 billion.
Capital expenditure has been reduced. If the state supplement maintains last year's repayment strength, it is expected that the free cash flow will recover this year. The company set up an accounts receivable management team to strengthen the assessment of accounts receivable.
Our opinion: The waste incineration industry is shifting to “operation is king”. The company focuses on three main businesses, insists on promoting four transformations, continues to increase its share of operations, and has begun to optimize the debt structure and strengthen the assessment of accounts receivable. The quality of operations is expected to continue to improve, and it is expected that free cash flow will be corrected this year. The company's latest closing price corresponds to 0.35x PB in 2023, and the potential dividend rate for 2023 is 8.0%. After tomorrow, the company is expected to increase the dividend ratio to protect shareholder returns. Undervaluation+high dividend targets that are improving cash flow have the potential to reevaluate their overvalued value. We raised our profit forecast. We expect the company's net profit to be HK$47/52/58 billion for 23/24/25, respectively, with a year-on-year growth rate of +1.3%/+12.5%/+10.5%, respectively. Maintaining the “increase in holdings” rating, the target price is HK$3.95.
Risk warning: The development of the transformation business fell short of expectations, and the price of raw materials rose.