Overview: The company's main business is water operations to expand the solid waste industry chain
The company is a state-owned enterprise under the Chengdu State-owned Assets Administration Commission. The business expanded from water operations to waste incineration, leachate treatment, sludge disposal, etc. As of 2023H1, the scale of the water supply & sewage treatment projects operated, under construction and proposed by the company was about 9 million tons/day, the scale of the reclaimed water utilization project was 1.22 million tons/day, the scale of the waste incineration power generation project was 14,400 tons/day, and the scale of the food waste disposal project was 1,750 tons/day. The company's annual equity incentive assessment targets 2023/2024 revenue of 800/90 billion yuan and EPS of 0.59/0.65 yuan/share, demonstrating confidence in development.
Water operations have achieved continuous steady growth as a traditional main business
The compound revenue growth rate of the company's sewage treatment/tap water in the past 5 years was 19.5% and 6.0%, with steady growth. The population of Chengdu has continued to grow, with a compound growth rate of 1.38% in the past 3 years, leading to an increase in domestic water demand. The economy of the Chengdu region continues to grow, the finance continues to be in surplus, and the probability of payment of sewage treatment service fees is low. In 2011-2022, per capita consumption expenditure and water prices in Chengdu rose by 92.4% and 6.3% respectively, indicating that residents' ability to guarantee payment of water bills is improving, and there is room for water price increases.
Forecast: Considering the progress of manual production capacity, the compound growth rate of the company's sewage treatment revenue is expected to be about 8.9% and the compound growth rate of tap water business revenue is about 6.0% in 2023-2026. The company's integration and outward expansion have brought outreach. We estimate that integrating the surrounding areas of Chengdu, such as Pidu District and Tianfu New Area, would increase the scale of water supply by about 1.637 million tons/day and increase in sewage treatment by 1.677 million tons/day.
Waste incineration: The operation scale is 6,900 tons/day, and the 7500 tons/day long-term planning waste incineration business is currently in operation, which is expected to reach 12,000 tons/day in 2026. It is estimated that after all production capacity under construction is put into operation, the utilization rate of waste incineration capacity in Chengdu can reach 89.4%, and can still maintain a high level. Waste incineration revenue is expected to be 6.49/6.67/678/896 million yuan in 2023-2026, with year-on-year growth rates of 2.7%/1.8%/32.1% in 2024-2026, respectively. Revenue from active projects is expected to reach 1.23 billion yuan when full production (capacity utilization rate is 100%).
Other: garbage leachate, sludge, reclaimed water and food waste disposal? Landfill leachate: The Chengdu Wanxing Environmental Protection Power Plant (Phase III) is expected to be put into operation in 2026, and the 2024 price adjustment is expected. It is estimated that the revenue of garbage leachate in 2023-2026 is 2.31/2.64/2.694 billion yuan, respectively, and the year-on-year growth rate for 2024-2026 is 14.6%/4.3%/6.8%, respectively.
Sludge: The Chengdu First City Sewage Sludge Treatment Plant (Phase III), which is currently under construction, is expected to be put into operation in 2025, and the 2024 savings price adjustment is estimated to have a compound revenue growth rate of about 15.1%.
Reclaimed Water: It is estimated that if the 45% recycled water utilization target proposed in the “Chengdu 14th Five-Year Plan” released in May 2022 is achieved, it will bring the company 91.98 million yuan in revenue, resulting in a revenue increase of about 49.2 million yuan.
Food waste disposal: Referring to the construction progress of various projects, it is estimated that the 2024-2026 food waste disposal revenue was 0.59/1.40/236 million yuan, respectively, and the year-on-year growth rates in 2025-2026 were 138.4% and 68.9%, respectively.
Investment logic: The compound net profit growth rate for 2023-2025 is 11.0%. The valuation is at a historically low level. The company's net profit for 2023-2025 is estimated to be 1.84 billion yuan, 2.04 billion yuan, and 2.22 billion yuan respectively, up 13.9%, 10.8%, and 8.7% year-on-year. The corresponding valuations are 9.9x, 8.9x, and 8.2x, respectively. The company's PE and PB levels are historically low, the margin of safety is high, and the valuation advantage is obvious, giving it a “buy” rating.
Risk warning
1. Risk of failure to adjust prices in a timely manner; 2. Risk that project progress falls short of expectations; 3. Risk that profit forecasting assumptions are unfounded or fall short of expectations.