Water supply and drainage business continues to grow, and profit forecasts and target prices have been raised
We raised Xingrong Environmental's net profit forecast for 23-25 to 18.26/20.29/2.132 billion yuan (previous value: 17.51/19.12/2,052 billion yuan), EPS of 0.61/0.68/0.71 yuan, and a three-year CAGR of 10%.
The increase is mainly based on: 1) the capacity utilization rate is expected to increase, raising the revenue forecast for tap water manufacturing and sales; 2) increasing the revenue forecast for sewage treatment services due to the recovery in demand and rising production capacity; 3) lowering the revenue forecast for waste incineration power generation, but increasing its gross margin forecast. The company's current stock price corresponds to 9.1/8.3/7.9xPE in 23-25, with a comparable PE average value of 10x in '24. The target PE for 24 years is 10x, and the target price is 6.8 yuan (previous value is 6.49 yuan, based on 11xPE in '23). The company's average dividend payout ratio in 20-22 is 21%. Considering that the company's free cash flow is expected to expand, we believe that the company's dividend payout ratio in 23-25 has the potential to increase, or will fully reflect the company's potential value. Maintain the “Overweight” rating.
Capacity utilization is expected to increase. The revenue forecast for tap water manufacturing and sales for the year 23-24 was raised. Up to now, the scale of water supply projects operated and under construction by the company exceeds 4.1 million tons/day, with projects distributed in Sichuan, Jiangsu and Hainan. The scale of the seven tap water plants (phase III) of the company's ongoing construction project is 800,000 tons/day, which is nearing completion. As the production capacity of the company's new production projects continued to rise, we raised the capacity utilization rate of the company's tap water manufacturing and sales business to 90%/93% in 23-24 (previous value 86%/91%), and increased the revenue forecast for this business by 4.7%/2.2%.
The recovery in demand and the decline in production capacity have raised the revenue forecast for sewage treatment services. Up to now, the scale of sewage treatment projects operated and under construction by the company exceeds 4.6 million tons/day. Of these, 2.63 million tons/day has been put into operation in central Chengdu and 1.22 million tons/day outside of Chengdu. As demand for sewage treatment recovered and the production capacity of the company's new production projects declined, we raised the capacity utilization rate of the company's sewage treatment service business to 85%/87%/89% (previous value 73%/77%/80%) in 23-25, and increased the revenue forecast for this business by 9.2%/15.8%/11.6%.
Lower the revenue forecast for waste incineration power generation, but raise its gross margin forecast. Due to adjustments in total investment estimates, project construction sites, etc., the Dalin Environmental Power Plant in Tianfu New Area is currently in the early stages of the project. Therefore, we lowered the new production capacity of waste incineration power generation in '23 to 0 (previous value: 2400 tons/day) and lowered the revenue forecast for this business for 23-25 by 17.3%/10.3%/7.1%; considering the reduction in depreciation of the new project in '23, we raised the gross margin of this business by 2.3 pcpct.
Risk warning: Risk of lower electricity prices for waste incineration power generation; project commissioning progress falls short of expectations.