Description of the event
High Energy Environment released its 2023 three-quarter report. The first three quarters achieved revenue of 7.49 billion yuan, an increase of 21.0% over the previous year; net profit of 658 million yuan, an increase of 9.1% over the previous year; and net profit after deducting 574 million yuan, an increase of 4.4% over the previous year.
Among them, 2023Q3 had revenue of 3.02 billion yuan, up 37.8% year on year; net profit of the mother was 164 million yuan, up 3.4% year on year; net profit after deducting non-return mother was 143 million yuan, up 6.4% year on year.
Incident comments
Projects such as Jiangxi Xinke were put into operation, and Q3 revenue increased year over year. The revenue of 2023Q3 company increased by 37.8% year on year, partly due to the low base for the same period last year (2022Q3 revenue growth rate was only 3.8% year on year); on the other hand, the Jiangxi Xinke deep processing project contributed more revenue in the third quarter after Q2 was put into operation (but it is estimated that the profit contribution was small). The Jiangxi Xinke project was put into operation one after another in April-May, and Q2 contributed 666 million yuan in revenue; in addition, the Chongqing Yaohui, Gansu Jinchang, and Jingyuan Phase II projects are also estimated to have increased year-on-year (continued operation in the second half of 2022). Also, in the first half of the year, the company's domestic waste treatment project revenue was 108 million yuan, a year-on-year decrease of 82.4%, mainly due to the fact that waste incineration projects under construction were put into operation one after another, and project revenue declined. It is estimated that this trend continued in Q3; environmental restoration projects may be affected by government financial pressure and the slowdown in commencement of construction, dragging down revenue.
The technical reform of hazardous waste recycling projects affected the load rate, and profitability declined a lot in Q3. The net interest rate of 2023Q3 company was 5.11%, down 2.72 pct year on year; of these, gross profit margin was 14.4%, down 3.65 pct year on year; period expenses were 9.5%, down 2.39 pct year on year.
The company's gross margin declined quite a bit in the third quarter. It is speculated that this may be due to the fact that although the Jiangxi Xinke project contributed to revenue after it was put into operation, the precious metal wire Q3 was in the technical reform stage, and the load rate was low, so it is estimated that the profit contribution was relatively small; the Chongqing Yaohui project may also have been dragged down. Q3 The company calculated credit impairment losses of $28 million (compared to just $0.06 billion in the same period last year). In addition, net profit attributable to Q3 declined a lot month-on-month compared to Q2, partly due to a decrease in investment income. The Q2 company had income from the sale of shares in Yuhetian. The total investment income was 107 million yuan, while Q3 was only 18 million yuan. In the fourth quarter, with the operations of projects such as Xinke in Jiangxi, Yaohui in Chongqing, and Jinchang in Gansu on the right track, the company's profit release can be expected.
2023Q3 Operating cash flow was positive, and subsequent savings continued to improve expectations. The net operating cash flow of the 2023Q3 company was 163 million yuan, the first time since 2022/Q4 that it has been corrected in a single quarter. Previously, in order to ensure the smooth production of the Jiangxi Xinke Project and the Gansu Jinchang Project, the major companies stocked a lot of materials in advance and spent a lot of procurement expenses, but the products were not yet fully sold to return funds.
At the end of 2023Q3, the company's inventory was 4.49 billion yuan, which continued to increase month-on-month; it is expected that as projects such as Jiangxi Xinke gradually enter business regularity in Q4, the company's operating cash flow is expected to continue to improve.
The fourth phase of executive equity incentives was implemented. On the evening of July 10, the company released the 2023 restricted stock and stock options incentive plan (draft), which is also the fourth equity incentive plan since the company's listing. The incentive target audience was 738 people, exceeding the total number of incentives in the previous three phases, and the scope of incentives increased significantly. Furthermore, since 2022Q2, the company's president, vice president, and directors have increased their holdings in the company many times, demonstrating confidence in future operations.
Profit forecasting and valuation: We believe that the technical capabilities, management and procurement systems accumulated by the company in the hazardous waste recycling sector continue to be strengthened. At present, the initial recycling production capacity for hazardous waste has reached about 725,000 tons, and Jiangsu, Guangdong, and Jiangxi Xinke front-end projects are still under construction, and off-site expansion is going smoothly; the deep processing sector already has projects such as Jingyuan Phase II, Jiangxi Xinke, Xinshengyuan, and Sine Wave. The beginning of 2023Q4 is expected to be a harvest period for the company's early production capacity. At that time, it will usher in a double impact on stock prices and performance. High Energy Environment is expected to return a net profit of 9.27/12.33/1,513 billion yuan in 2023-2025, an increase of 33.9%/33.0%/22.7% over the previous year. The PE valuation is 13.0x/9.8x/8.0x, maintaining the “buy” rating.
Risk warning
1. The construction progress of the hazardous waste recycling project falls short of the anticipated risk; 2. The production capacity utilization rate falls short of the expected risk due to the low amount of hazardous waste collected.