Core views:
Net profit was the same year over year, but the profit structure, cash flow, and debt situation improved markedly. The company released its semi-annual report for 2023. In the first half of the year, it achieved operating income of 16.297 billion yuan (-24% year-on-year) and net profit of 2,785 billion yuan (-1% year-on-year). Revenue declined due to the contraction of the engineering business, but the revenue structure continues to be optimized, with operating revenue accounting for 59% in the first half of the year (+14 pcts over the previous year).
Net operating cash flow for the full year 2022 was $4.09 billion (-$1,563 billion for the same period last year), and the balance ratio at the end of the 2023H1 period was 65% (down 2 pcts from the previous year).
The environmentally friendly energy business continues to grow steadily, and the “era of operation” is about to arrive. In the first half of the year, the company achieved a garbage disposal volume of 23.87 million tons (+8% year on year) and 1.26 million tons of food and food waste (+32% year on year), driving the company's solid waste operation of HK$4.540 billion. As of 2023H1, 148 projects were in operation, with a scale of 47.9 million tons/year, and there were only 8 projects under construction, with a scale of 3.52 million tons/year. The subsequent focus was on project mergers and acquisitions, overseas markets, and the “incineration +” business layout.
Investment-driven trends have taken precedence, and the “high dividend” characteristic continues to stand out. In 2023H1, in addition to signing a new waste incineration production capacity of 2,000 tons/day, the company also signed a new contract of 775 tons/day of food and food waste, 50,000 tons/year of biomass raw materials, 180,000 meters? /Daily water treatment and 32.5MW photovoltaic projects, diversified businesses have achieved steady expansion. Furthermore, the company paid out HK$0.14 per share for the first half of the year, with a corresponding dividend payment rate of 30.88%. The dividend rates from 2020 to 2022 reached 6.85%, 5.43%, and 6.88%, respectively, and the corresponding dividend rate TTM could be as high as 8.39%. We expect future dividend potential to be even more prominent as the company shifts from being investment-driven to a combination of priorities and continues to optimize debt and financial expenses.
Profit forecasts and investment recommendations. It is estimated that the company's net profit for 2023-2025 will be HK$461/4.82/503 billion respectively, corresponding to PE of 3.91/3.74/3.58 times. Free cash flow from waste incineration leaders is promising, undervalued yet the profit structure continues to improve, giving 6 times PE in 2023, corresponding to a reasonable value of HK$4.50 per share, and a “buy” rating.
Risk warning. Changes in waste incineration power generation subsidy policies; recovery of the main business fell short of expectations, etc.