1H23 profit recovered month-on-month, still under pressure year on year
Hailuo Environmental Protection 1H23 achieved net profit attributable to the parent company of 200 million yuan, -19.7% year-on-year. The significant year-on-year decline in hazardous waste and general industrial solid waste disposal prices is the main reason 1H23's profit is under pressure, although the rapid increase in disposal volume has moderately compensated for the adverse effects of the price decline. From 2H22 to 2H22, gross profit increased by 1.8pp to 50.1%, gross margin increased by 1.8pp to 50.1%, showing signs of steady improvement. Taking into account the lower volume of fly ash and sludge disposal, the higher general hazardous waste disposal volume and the lower average disposal price, we lowered the company's 2023/2024/2025 EPS by 11.1%/10.0%/6.2% to 0.23/0.31/0.40, respectively, and the target price by 9% to HK$4.0, based on the DCF valuation (WACC:
10.6%, sustainable growth rate: 0.5%). Although competition in the hazardous waste treatment market is still fierce, the pattern is expected to be gradually optimized, and collaborative disposal companies are expected to occupy a more important market position. With excellent cost competitiveness and rich collaborative disposal resources, the company has plenty of room for growth. Maintain the “buy”.
Disposal prices continued to decline, but the advantage of collaborative disposal further showed that the average comprehensive disposal price of 1H23 hazardous waste was 1,157 yuan/ton, -19.3% year on year and -12.9% month on month. The trend of continued decline was mainly affected by the decline in the average price of cement kiln collaborative disposal projects (-22.9%/-15.5%, respectively), while disposal prices for sludge/fly ash all showed a steady trend (+11.1%/+2.6% year on year). The company's comprehensive hazardous waste disposal volume was +34.5% to 546,000 tons, of which the collaborative disposal of cement kilns (general hazardous waste) was +43.6% to 486,000 tons, and the utilization rate of qualified production capacity was +7.9pp to 33.8% year-on-year. Benefiting from good control and increased utilization, the cost of collaborative disposal was -18.3% year-on-year to 500 yuan/ton. The cost advantage of the cement kiln collaborative disposal project is being further consolidated.
Competition in the industry is fierce, but the pattern is expected to be gradually optimized
Due to the excessive growth in hazardous waste production capacity and the slowdown in the growth rate of waste production volume in the early stages, the hazardous waste disposal industry still faces a large conflict between supply and demand, which inhibits the rapid rebound and repair of disposal prices in the short term. However, we think the industry landscape is gradually being optimized. In a fiercely competitive environment, some disposal companies with high energy consumption, high pollution, and high cost using traditional processes may gradually exit, while disposal companies with collaborative disposal processes as the core are expected to gradually occupy a more important market position. In this process, industry concentration is expected to increase significantly (end of 2022: CR10 about 7.9%), and collaborative disposal companies are also expected to apply more of the “price-cost-benefit” business philosophy to the hazardous waste disposal industry.
Cost advantages and rich collaborative disposal resources support the company's growth
Thanks to competitive disposal costs, rich cement kiln collaborative disposal resources and sufficient project reserves, we are optimistic that the company will become a beneficiary of potential changes in the hazardous waste industry, and take this opportunity to grow from a small leading disposal enterprise to an industry leader with leading capabilities.
Risk warning: economic growth is lower than expected; hazardous waste regulation is weaker than expected; maintenance of strategic partners is weaker than expected.