Description of the event

In the first three quarters of 2023, Yingfeng Environmental achieved operating income of 8.990 billion yuan, an increase of 6.79% year on year, and net profit of 603 million yuan, an increase of 15.26% over the previous year. Among them, Q3 achieved revenue of 2,858 billion yuan in the single quarter, an increase of 3.91% over the previous year, and net profit of 230 million yuan, an increase of 15.94% over the previous year.

Incident comments

Revenue grew steadily, and profits recovered. The company achieved a double increase in revenue and profit in the first three quarters against the backdrop of declining industry sentiment. The main reasons for speculation include: 1) Although the industry's overall sales volume still showed a downward trend in the first three quarters (sanitation equipment insurance volume fell 6.6% in the first three quarters), the new energy sanitation equipment risk increased by 36.5%. At the same time, the company's market share of new energy sanitation equipment increased slightly to 29.4% from 29.2% in 2022; 2) The contribution of sanitation service orders into the operating period increased steadily.

Gross margin has steadily rebounded, and the expense ratio has increased over the period. The company's comprehensive gross margin for the first three quarters was 24.76%, up 1.72pct year on year. It is speculated that the main reasons are: 1) the increase in new energy equipment, and changes in the revenue structure of the equipment business led to an increase in the gross margin of this business; 2) the stock of sanitation service projects entered a period of stable operation, and the effects of fine management gradually began to highlight the gradual increase in the gross margin of sanitation services; 3) the price increases in commodities such as steel in the past few years have boosted the company's manufacturing costs, and the cost side has eased in 2023.

Looking at the cost ratio, the company's expenses rate for the first three quarters was 15.95%, up 1.43pct year on year, of which the sales expense ratio increased by 0.57pct to 6.95%. It is speculated that it was mainly due to the development of new target markets for sanitation services, the increase in marketing expenses, and the management and R&D expenses rate increased by 1.37pct to 8.25%. Presumably, mainly due to the expansion of the scale of new energy intelligent sanitation equipment and the corresponding increase in management costs, the financial cost rate fell by 0.52pct to 0.75%. The payout ratio maintains a healthy level.

The company's revenue ratio for the first three quarters was 95% (94% for the same period last year), a slight improvement over the previous year.

It is expected that the continuous promotion of sanitation services and the increase in the volume of new energy sanitation equipment will drive performance improvement. On January 30, 2023, eight departments including the Ministry of Industry and Information Technology issued the “Notice on Organizing and Carrying Out Pilot Work on the Comprehensive Electrification Pilot Zone for Public Sector Vehicles”, which proposed: “Initiate pilot work on the full electrification of public sector vehicles nationwide”, requiring that the proportion of new energy vehicles added and updated in the pilot field should strive to reach 80%. At present, although the penetration rate of new energy equipment is only about 8%, the future growth of new energy sanitation equipment is very flexible.

Net profit for 2023-2025 is estimated to be 8.9, 10.4 and 1.21 billion yuan respectively, corresponding to PE 17x, 15x and 13x, maintaining the “increased holdings” rating.

Risk warning

1. The marketization process of sanitation fell short of expectations;

2. The competitive pattern for new energy equipment has deteriorated.