The transformation has been completed, the sail has set sail, and the attributes of high-quality utility operators have been highlighted. The company belongs to Henan state-owned assets. In 2017, the asset exchange transformation highway was launched, and in 2018 it entered the environmental protection track. The solid waste production capacity increased dramatically to 26,500 tons/day within 5 years (as of 23Q3). In recent years, the company's business structure has completed two major changes: (1) operating business (solid waste and sanitation, highways, water supply and sewage treatment, etc.) revenue increased from 57% in 2020 to 72% in 2023Q1-3, and (2) solid waste business revenue increased from 0% in 2018 to 41% in 2023Q1-3 (the share of 2023Q1-3 expressways fell to 23%). The company has transitioned from mainly engineering/highway business to a utility operator company. According to our profit forecast, the company's current PE in 2023 is only 5.8x, which is significantly lower than other peer companies.

The accounts receivable age and customer structure are healthy, and the decline in state subsidies has had limited impact. The market is concerned that the company's accounts receivable are large and affect cash flow: (1) the top five arrears customers as of 23Q3 were mainly state-owned enterprises such as companies affiliated with the State Grid, accounting for 82% of accounts receivable within one year; (2) Accumulation of domestic compensation arrears was accelerated. As of 23Q3, solid waste receivables (mostly national compensation arrears) amounted to 1.96 billion yuan, accounting for 77% of total receivables. As of 23Q3, 32 projects were in operation, and only 6 were competitively deployed (accounting for 22% of production capacity). The impact of the decline was limited, and the company relieved the pressure of decline through heating transformation.

Capital expenditure has shrunk, free cash flow has been corrected at an accelerated pace, and emphasis is placed on dividend potential. The company's free cash flow (net operating cash flow - net investment cash flow outflow) narrowed from -4.9 billion yuan in '21 to -700 million yuan in '22. Considering that all waste incineration production capacity will be put into operation before the end of the year 23, capital expenditure may shrink sharply in '24 and beyond, and free cash flow will be corrected at an accelerated pace. Furthermore, in 2022, the company's dividend payment rate was only 10%, and the corresponding annual dividend rate was less than 2%, so the potential for dividends is outstanding.

Profit forecasts and investment advice. Net profit for 23-25 is estimated at 12.1/12.8/1.37 billion yuan, and PE is 6.0/5.6/5.3 times higher. A high-quality utility operator with outstanding asset revaluation potential. It gave the company 23-year 10xPE, corresponding to a reasonable value of 18.82 yuan/share, and maintained a “buy” rating.

Risk warning. Construction progress is expected to be low; return on construction projects is declining; risk of subsidy disbursement, etc.