The company's performance for the first three quarters of 2023 was in line with expectations, mainly due to the continuous improvement in the difference between natural gas purchases and sales, driving the energy business to achieve a net profit of about 140 million yuan in the first three quarters, an increase of about 220 million yuan over the previous year. We expect that the company's capital expenditure for the full year of 2023 will drop to around 2 billion yuan, a significant improvement from 3.2 billion yuan in 2022. At the same time, it will achieve net operating cash flow of 1,631 billion yuan. The cash flow situation will continue to improve. The company's excellent operation and management capabilities contributed to a 23.2% increase in net profit in the first three quarters of the incineration power generation operation business. New projects & new markets continued to contribute new growth points to the company and continued to consolidate the company's competitiveness in the field of municipal solid waste. Taking into account the company's model advantages, strategic layout, and medium- to long-term profitability of core assets, the company was given a target price of 21 yuan to maintain a “buy” rating.

Profits rose high, and performance was in line with expectations. The company achieved revenue of 8.962 billion yuan in the first three quarters of 2023, a year-on-year decrease of 6.74%; net profit of 1,166 billion yuan, a year-on-year increase of 34.5%; and an EPS of 1.43 yuan, in line with expectations. On a quarterly basis, the company achieved revenue of 3,035 billion yuan, a year-on-year decrease of 12.7%; net profit of 476 million yuan, a year-on-year increase of 48.6%; converted EPS of 0.58 yuan.

The energy business achieved profit, etc., boosted high performance, decreased capital expenditure, and significantly improved cash flow. The company's net profit for the first three quarters of 2023 increased by 34.5% year-on-year to 1,166 billion yuan, mainly due to continued improvements in natural gas purchase and sales spreads, driving the energy business to achieve net profit of about 140 million yuan in the first three quarters, a year-on-year increase of about 220 million yuan, turning a loss into a profit. In addition, the company's officially confirmed revenue from waste incineration power generation projects such as the Pingping Project, Guiping Project, and Kaiping Project renovation and expansion, which were newly put into operation in 2023, also contributed to a certain extent. The company's management/sales/finance expense ratio for the Q3 period was 5.04%/0.97%/4.64%, respectively, with a year-on-year change of +0.68/-0.04/+1.06pcts. The company's capital expenditure for the first three quarters was about 1.6 billion yuan. We expect capital expenditure for the full year of 2023 to drop to around 2 billion yuan, a sharp drop from 3.2 billion yuan in 2022. Due to the continuous completion of the company's ongoing projects and the decline in newly started projects, we believe that the company's capital expenditure on new construction will continue to decline in the future.

The company's net operating cash flow for the first three quarters of 2023 was 1,631 billion yuan, an increase of 1,528 billion yuan over the previous year. The main reason was the company received 988 million yuan in accounts receivable debt transfers in Q3 and a decrease in cash expenses. As the company continues to push for the establishment of normalized institutional guarantees and gradually accelerates the speed of receivables, the company is expected to further improve its cash flow situation.

Net profit from operating businesses increased, and new projects & new markets developed business depth and breadth. Against the backdrop of a slowdown in the overall growth rate of the waste incineration power generation industry, according to the company's announcement, the company's domestic waste incineration power generation project was still newly put into operation 1,750 tons/day in the first three quarters of 2023. Combined with the increase in production capacity of last year's new projects, the company's domestic waste incineration business (excluding engineering and equipment) achieved net profit of 716 million yuan in the first three quarters, an increase of 23.2% over the previous year.

In August 2023, the country's first large-scale integrated biogas hydrogen production and hydrogenation project, the Hanlan Renewable Energy (Biogas) hydrogen production project, was officially put into operation. It is estimated to produce 2,200 tons of hydrogen per year, marking the full implementation of the “production, addition, transmission, and use” integration of Hanlan's hydrogen energy business. Furthermore, in August, the company announced that it plans to acquire 40% of the shares of Xinyuan (China) Environmental Technology Co., Ltd. (hereinafter referred to as “Xinyuan China”), with a transaction amount of no more than 200 million yuan. Xinyuan China has already put into operation the Thai agricultural reclamation 1 (500 tons/day) waste-to-energy project in Thailand, and is preparing to build a 1 (500 tons/day) waste-to-energy project in Thailand Agricultural reclamation 2 (1,400 tons/day) and Annu (1,400 tons/day) waste-to-energy projects. We believe this acquisition is expected to help the company open up the vast incineration power generation market in Southeast Asia and create a new driving force for performance growth. At the same time, it is expected that after the acquisition is completed, the company will play an important role in the operation of the target company, exporting the company's efficient operation and management experience overseas.

Risk factors: unsmooth gas prices; projects under construction are not progressing as expected; incineration power generation subsidy adjustments; decline in the ability of some local governments to pay; REITs projects are not progressing as expected; mergers and acquisitions integration risks; geopolitical risks.

Profit forecast, valuation and rating: Considering that the improvement in profitability of the natural gas business is within expectations and that the results for the first three quarters are in line with our expectations, we maintain the 2023-2025 net profit forecast of 1.42 billion /1.63 billion /1.94 billion yuan, equivalent to the EPS forecast of 1.74/2.00/2.37 yuan. The current stock price corresponding to 2023-2025 PE is 10/9/7 times, respectively. Taking into account the stable business model of the company's business, efficient management, the end of the capital expenditure cycle, and the current valuation at the bottom of the historical valuation range, the company's historical average PE over the past three years minus one times the standard deviation is used as the target PE, giving the company 12 times the target PE for 2023 and the corresponding target price of 21 yuan, maintaining the company's “buy” rating.