The company's 23Q3 performance fell short of expectations, mainly because sales of finished products from solid hazardous waste recycling projects such as Jiangxi Xinke and Jinchang High Energy fell short of expectations. The company's inventory for the first three quarters increased 70% compared to the end of 2022, freeing up more room for future performance. The company's cash flow for the first three quarters decreased by 283% year on year, but the cash flow for the Q3 quarter increased 186% year on year. With the steady operation of key projects, it is expected that cash flow will improve further. The company announced that it plans to invest 140 million yuan to acquire 51% of Zhongxin Hongwei's shares and further improve the solid waste recycling industry chain.
As the operation of the company's key solid waste recycling projects continues to improve, we believe that the company's future growth is still very sufficient. Give a target price of $10 to maintain the company's “buy” rating.
The 23Q3 performance fell short of expectations. The company achieved operating income of 7.490 billion yuan in the first three quarters of 2023, an increase of 21.0% over the previous year; net profit of 625 million yuan, an increase of 9.1% over the previous year; converted EPS of 0.43 yuan. Looking at a single quarter, the company achieved operating income of 3,022 billion yuan in 23Q3, an increase of 37.8% over the previous year; net profit of 164 million yuan, a year-on-year increase of 3.4%; converted EPS of 0.11 yuan. The Q3 performance fell short of expectations, mainly because sales of finished products from solid waste recycling projects such as Jiangxi Xinke and Jinchang High Energy fell short of expectations.
The new production and operation project has led to revenue growth, and the Xinke Jinchang double project can be expected to improve cash flow. As construction projects were reduced and production was gradually put into operation, revenue in the solid waste and hazardous waste resource utilization sector increased, driving an increase in solid waste treatment operating revenue in the company's main business segment and driving Q3 revenue to increase by 37.8% year-on-year. Q3 The company's gross margin fell 3.7 pcts to 14.4% year on year, mainly due to the continued high prices of raw materials and the fact that production capacity for new production projects still needs to rise. Q3 The company's sales/management/finance expense ratio changed year-on-year by -0.2/+0.2/-1.5pct (s), respectively. As of 2023Q3, the company's inventory reached 4.49 billion yuan, an increase of 70.3% over the end of 2022. The main reason is that Jiangxi Xinke and Jinchang have purchased a large amount of raw materials and finished products have not yet been sold, freeing up space for future performance. The company's Q3 net operating cash flow rose sharply by 186% year on year to 163 million yuan. This is due to the repayment of some products sold by Jiangxi Xinke and Jinchang High Energy Projects. Although the company's net operating cash flow for the first three quarters decreased by 283% year-on-year to -1.2 billion yuan, according to the three-quarter report, most of the raw materials for the two major projects mentioned above have not yet been processed and sold. We expect the cash flow situation to improve further after the stable operation of the project.
The acquisition of Zhongxin Hongwei will further improve the solid hazardous waste industry chain and wait for key solid waste recycling projects to gain momentum. The company began active mergers and acquisitions in 2021, broadening the solid hazardous waste recycling business industry chain, extending from the original front-end recycling to back-end deep processing, enhancing business collaboration and profitability; at the same time, horizontally expanding various recycling categories such as metals, medical waste, and rubber, opening up room for performance growth. In October 2023, the company announced that it plans to invest 140 million yuan to acquire 51% of Zhongxin Hongwei's shares, horizontally expand comprehensive resource utilization and recycling business for recycled plastic segments such as PA and PET, and further improve the solid and hazardous waste recycling industry chain. At the same time, according to the company's interim report disclosure and project progress estimates, although key solid waste recycling projects of companies such as Jiangxi Xinke and Jinchang High Energy did not meet expectations in Q3, we expect some of the difference to be recovered in Q4 and contribute a good increase in the company's performance next year. We believe that the continuous exploration of the solid hazardous waste recycling industry chain and the management improvement of operating projects have opened up sufficient development space for the company, and that the company's performance potential is still worth looking forward to.
Risk factors: progress of projects under construction falls short of expectations; competition in the hazardous waste industry intensifies; incineration power generation subsidy adjustments; sales of finished products fall short of expectations; delays in completion of technical improvements in operating projects; risk of mergers and acquisitions integration, etc.
Profit forecast, valuation and rating: Since the company has a large number of finished products in Q3 that have not yet been sold, we believe that Q4 performance is expected to be significantly restored. We maintain our 2023-2025 net profit forecast of 934 million /1,201 million/1,542 billion yuan, corresponding to EPS of 0.61/0.78/1.00 yuan. The current stock price corresponding to PE is 13/10/8 times, respectively. Using the company's historical average PE of the past three years minus one times the standard deviation and giving a 20% discount as the target PE, we arrived at 16 times the target PE valuation for 2023 and gave a target price of 10 yuan (the original target price was 12 yuan) to maintain the “buy” rating.