The decline in construction revenue is a drag on overall performance, maintaining the "buy" rating. Yuefeng Environmental Protection released 1H23 results on August 24: revenue fell 27.5% year-on-year to HK $2.98 billion, while net profit attributed to shareholders fell 21.2% to HK $610 million. As the construction scale of the project is lower than we expected, we downgrade our forecast of construction revenue. It is estimated that in 23-25, EPS will reach HK $0.45, 0.49 and 0.55 (previous value: 0.55, 0.58 and 0.63). Considering that 1H23 accounts for 57.7% of waste disposal in Guangdong Province, while the waste disposal fee in Guangdong Province is higher, the local government has strong environmental awareness and better financial capacity, and the competitiveness of Yuefeng's operation business has improved. Give the company 12.0 times the 2023 forecast PE (comparable company Wind consensus average: 9.2 times), corresponding to the target price of HK $5.40 (previous value: HK $4.84, corresponding to 8.8 times the 2023 forecast PE). Maintain a "buy" rating.

Waste incineration capacity of 43,000 tons / day, 1H23 power generation year-on-year + 19% of the company continues to promote waste incineration project construction, as of June 30, 2023, the company put into operation project domestic waste incineration capacity of 42690 tons / day (2022: 41890 tons / day), the company expects 2023 put into operation capacity will reach 43690 tons / day. In February 2023, the company sold 55% of the Changning waste incineration power generation project and 20% of the Shenxian waste incineration power generation project. as of June 30, there were 3 projects under construction / planning in hand production capacity of 54540 tons per day. In the first half of the year, the garbage disposal capacity was 8.08 million tons (yoy+18.3%), the power generation rate was 3.08 billion kilowatt-hours (yoy+19.4%), and the self-electricity consumption rate was 13.6 percent (yoy+0.1pp). The operating target continued to rise.

After excluding the influence of exchange rate, the operating income was + 6% compared with the same period last year, and the construction income dropped sharply. The company's income from electricity sales and waste disposal / construction services / sanitation services decreased significantly by HK $9971,000,000. Compared with the same period last year, the operating income increased steadily. After excluding the influence of exchange rate, the corresponding income was 1.54 billion RMB, and the corresponding income was 8.83 billion RMB compared with the same period last year. The decrease in the number of projects under construction has led to a sharp decline in construction revenue. In the first half of the year, the company's gross profit margin was 38.0% (yoy+7.7pp), mainly due to a substantial increase in the proportion of operating income with higher gross profit margin and an improvement in major business gross profit margins, including electricity sales and garbage disposal / construction services / sanitation services gross profit margin of 46.7% 16.7pm, year-on-year + 0.8/+1.8/11.7pp.

1H23 received HK $884 million in cash from operating activities, and the successful registration of VCS shows that the increase in green and low-carbon production capacity has brought a significant improvement to the company's operating cash flow. The net operating cash flow of 1H23 is HK $385 million (1H22:-7.95 billion), of which the cash / BOT construction from operating activities is HK $884 million (1H22:9.02/-16.96 billion) respectively. The Yingkou project (the first phase of 1500 tons / day has been put into operation) has been successfully registered on the certified carbon standard (Verified Carbon Standard, VCS) platform, and the company expects to reduce 245000 tons of carbon dioxide equivalent per year. We believe that the company's cash flow will continue to improve, highlight the green and low-carbon attribute, and is expected to get a revaluation.

Risk hint: the construction scale of municipal solid waste incineration is lower than expected, the risk of waste incineration operation and industrial synergy are lower than expected.