The company's performance grew steadily and cash flow continued to improve, making it an important target for the defense sector. The first three quarters of 2023 achieved operating income of 3,068 billion yuan, +78.13% year over year; realized net profit of 828 million yuan, +21.43% year over year; achieved investment income of 652 million yuan, +15.62% year over year, and net profit of 277 million yuan after excluding investment income from GF Securities, +82.83% year over year, continued to focus on the development of the main business and reduce the impact of GF Securities equity on the company's operations. At the same time, the company's operating cash flow continued to improve, achieving net cash flow from operating activities of 188 million yuan in the first three quarters of 2023, an increase of 108.38% over the previous year. In the future, as the company continues to concentrate on the development of its main business, the engineering sector's drag on operating cash flow is expected to weaken, and the company's cash flow is expected to gradually improve.

Actively integrating Zhongshan's water supply assets, further increasing the local water market share. On December 20, 2023, the company issued the “Notice on the Zhongshan Zhenjie Water Supply Asset Acquisition Project”. In order to promote the implementation of the company's 2021-2026 strategic development plan, focus on the development of the main business, and integrate local water supply businesses, the company plans to integrate 13 water supply enterprises in Zhongshan City with a wholly-owned subsidiary, Zhongshan Public Water Investment Co., Ltd. as the implementing entity of the “Water Supply One Game”. This time, the assets of 9 of these water supply companies are estimated at 760 million yuan. By the end of June 2023, the company had a water supply design capacity of 2.36 million tons/day, undertaking about 75% of the water supply tasks in Zhongshan City, covering 20 markets in the city, serving about 940,000 households. After completing the integration of water supply assets, the company can better focus on the development of the core business in the water sector, further expand the local water service market share. Based on the average daily water supply volume, the water market share can increase from 73% to more than 80%.

Extend the framework agreement with Changqing Group and continue to promote the integration of local solid waste resources. On December 30, 2023, the company issued the “Notice Concerning the Signing of a Supplementary Agreement to the Equity M&A Framework Agreement”, which extends the validity of the agreement with Changqing Group until May 31, 2024. After the extension of the original agreement, it is beneficial to promote the smooth implementation of the original agreement. At the same time, if the company successfully completes the relevant target mergers and acquisitions, it will help integrate local solid waste resources, expand the business scale of the company's solid waste sector, and consolidate the company's overall strategic development plan.

An increase in water prices in Zhongshan is in sight. Water supply prices in Zhongshan have not been adjusted for more than ten years, clearly lagging behind the cities surrounding the Pearl River Delta. It is expected that with the major trend of rationalizing water prices, Zhongshan is expected to see an increase in water prices, ending the company's many years of pressure on water prices.

Profit forecast: Maintaining the company's “buy” rating. We expect the company to achieve operating income of 43.18/49.42/5.493 billion yuan in 2023-2025 and achieve net profit of 15.72/18.38/21.34 billion yuan, corresponding PE of 6.97x/5.96x/5.14x respectively.

Risk warning: Changes in the macroeconomic situation at home and abroad have exceeded expectations; the rise in water prices has fallen short of expectations; business expansion falls short of expectations; the growth rate of the scale of new energy has fallen short of expectations; changes in investment income have exceeded expectations; profit forecasts and valuation models have fallen short of expectations