Matters:
The company released a report for the first three quarters of 2023. During the reporting period, the company achieved operating income of 7.490 billion yuan, an increase of 21.00% over the previous year; net profit attributable to shareholders of listed companies was 658 million yuan, an increase of 9.13% over the previous year.
Commentary:
Xinke and Jinchang started production smoothly, and revenue and profit increased steadily. 1) In terms of revenue and profit, 23Q1-Q3 achieved operating income of 7.490 billion yuan, an increase of 21% over the same period last year, and net profit of 658 million yuan, which is close to the level of the full year of last year. Among them, Q3 alone achieved revenue of 3,022 billion yuan, a significant increase of 37.78% over the same period last year, mainly due to the smooth commencement of production and smooth operation of the Jiangxi Xinke and Gansu Jinchang projects. 2) At the cost and cost level, due to fluctuations in commodity prices, the gross margin of 23Q1-Q3 companies declined by 2.53pct to 18.87%; the sales/management/R&D expense ratio was 1.45%/4.45%/2.17% respectively, which was 0.16/0.1/-0.44pct respectively, compared to the same period last year. The increase in sales expenses was mainly due to an increase in solid waste resource utilization sector projects, an increase in production capacity, an increase in the company's procurement of raw materials, and an increase in market expenses. In addition, employee social security and fund expenses also increased.
Companies with high inventories have freed up profit reserves for Xinke projects. As of September 30, 2023, the inventory value on the company's books reached 4.492 billion yuan, an increase of 70.29% over the end of the previous year, mainly due to the fact that the raw materials and finished products purchased by Jiangxi Xinke and Jinchang companies to meet normal production needs have not been fully sold. We believe that as this portion of inventory is converted into commodities in the future, the company's profit is expected to continue to grow.
Equity incentives demonstrate confidence. On September 8, 2023, the company's board of directors and board of supervisors officially deliberated and passed the “Proposal on Granting Restricted Stock and Stock Options to Incentives Targets of the Company's 2023 Restricted Stock and Stock Options Incentive Plan”. The performance assessment targets for each year at the company level for 2023-2026 are: the growth rate of non-net profit is not less than 30%/50%/80%/100% compared to '22. We believe that this incentive plan will help bind the interests between employees and the company and stimulate employees' enthusiasm for work. If all of them are unlocked, the estimated cost of restricted stock amortization for 2023-2027 is 676.33, 1,657.09, 761.82, 369.66, and 1,2742 million yuan (a total of 35.9232 million yuan), respectively, and the impact on the company's performance is limited overall.
Investment advice: Maintain a “strong push” rating and target price of 9.62 yuan for 2024. As the overall performance fell short of expectations, we lowered our profit forecast for the company: the company's net profit from 2023 to 2025 is estimated to be 962 million yuan (previous value 1,194 million yuan), 1,138 billion yuan (previous value: 1,469 million yuan), and 1,338 billion yuan, respectively, corresponding to 13 times PE, 11 times and 9 times PE, respectively. We selected Grimmie and Weiming Environmental Protection as comparable companies, and gave the company its 2024 target PE 13 times, corresponding target price of 9.62 yuan.
Risk warning: increased competition in the industry, project commissioning falls short of expectations, production capacity falls short of expectations, payback of accounts receivable falls short of expectations, environmental safety risks of hazardous waste projects, and risk of sharp fluctuations in commodity prices.