The company's 2023H1 waste incineration power generation business grew steadily, but overall performance fell short of expectations due to a serious decline in profits contributed by associated companies. On the one hand, the scale of 2023H1's traditional waste disposal business has grown significantly, and production capacity for new projects has been successfully invested; on the other hand, the expansion of the new energy business is accelerating, and the second growth curve is beginning to bear fruit.

Considering that the net profit of the joint venture company Hailuo Cement 2023H1 has declined a lot, and the company's return on investment in the joint company has declined, we lowered the 2023-2025 EPS forecast to 2.06/2.35/2.54 yuan (the original forecast was 2.84/3.37/3.81 yuan). Maintain the “buy” rating with a target price of HK$10.

The 2023H1 basic EPS was 1.00 yuan, which was lower than expected. In 2023H1, the company achieved operating income of 4.438 billion yuan, an increase of 16.0% over the previous year; realized net profit of 1,818 million yuan, a year-on-year decrease of 25.2%; converted to basic EPS of 1.00 yuan. The performance fell short of expectations, mainly because the profit of the associated company Hailuo Cement fell sharply by 33.0% year on year.

After excluding 1,269 million yuan in profits attributable to associated companies, the company achieved net profit of 549 million yuan, an increase of 1.21% over the previous year, maintaining steady development.

The incineration power generation operation results are outstanding, and the revenue structure continues to be optimized. According to the company's announcement, 2023H1's waste incineration power generation scale increased significantly. It received a total of about 7.56 million tons of household waste, an increase of 35% over the previous year, and achieved feed-in electricity volume of about 2.15 billion kilowatts, an increase of 33% over the previous year, driving overall operating revenue up 40.7% year on year to 1.7 billion yuan. The company achieved construction revenue of 1.7 billion yuan in 2023H1, a year-on-year decrease of 8.0%. The overall gross margin of 2023H1 was 26.6%, down 3.0 pcts from the previous year. The main reason was that the energy-saving equipment/new building materials business was affected by market fluctuations, and the gross margin fell 13.1/11.6 pcts respectively. The cost rate for the 2023H1 company decreased by 0.9 pct to 14.4% year-on-year, and the fee rate remained stable. Judging from the level of debt, 2023H1's balance ratio was 42.5%, an increase of 5.0 pcts compared to the end of 2022, mainly due to the company raising 2.7 billion yuan by issuing medium-term notes.

Production capacity for operating projects has been put in smoothly, and the expansion of new energy projects has accelerated. According to the company announcement, 2023H1 has achieved remarkable results in project development. 7/4 new waste incineration power generation projects have been put into production/signed (including mergers and acquisitions), forming a waste incineration power generation operation/handling scale of 39,950/55,950 tons/day, which is among the highest in the country. In addition, some of the company's new energy projects have been put into operation and generated revenue, with 2023H1 contributing 296 million yuan in revenue. In terms of lithium battery recycling, 2023H1 has signed three comprehensive lithium battery recycling projects in Shijiazhuang in Hebei, Zaozhuang in Shandong, and Tongchuan in Shaanxi. The total disposal scale is 90,000 tons/year. The scale of the new contract is double that of the previous total scale, speeding up the expansion. In addition, 2023H1 successfully acquired a packaging container recycling project, which can dispose of 430,000 packaging containers/year. In the future, the company is expected to continue to sign contracts for lithium battery recycling projects, contributing to increased performance and opening up a second growth curve for the company.

Risk factors: Project progress falls short of expectations; market competition is fierce; cement prices fluctuate greatly; new energy business expansion falls short of expectations.

Investment advice: Considering that the net profit of the joint venture company Hailuo Cement 2023H1 has declined a lot, the company's return on investment in the joint company has declined, so we lowered the 2023-2025 EPS forecast to 2.06/2.35/2.54 yuan (the original forecast was 2.84/3.37/3.81 yuan). The company's current stock price corresponds to 3/3/3 times PE from 2023 to 2025, respectively. Considering that the performance growth rate of the joint venture company may be lower than expected, we used the company's historical average PE for the past three years as the target PE to arrive at 5 times the target PE valuation for 2023, corresponding to the target price of HK$10, and maintain the “buy” rating.