The volume and price of hazardous waste are weakening combined with accounts receivable provisions. 2H23's performance is weaker than the expected Hailuo Environmental Protection to achieve net profit of 264 million yuan in 2023, or -19.6% year over year. Of these, 2H23 achieved net profit attributable to the parent company of 64 million yuan, -19.4% year over year, weaker than our expectations (220 million yuan), mainly due to: 1. The volume and price of hazardous waste disposal were lower than our expectations; and 2. The provision for accounts receivable was higher than our expectations. We reduced the company's 2024/2025 EPS by 45.1%/42.7% to 0.17/0.23 yuan, respectively, and forecast the 2026 EPS by 0.29 yuan. The target price based on DCF (WACC: 10.8%, sustainable growth rate of 0.5%) will be reduced by 65% to HK$1.4.
Although competition in the hazardous waste market is still fierce, we believe that with abundant disposal resources, excellent process management, and further deepening collaboration in cement production, the company's competitive advantage is still stable.
Maintain a “buy” rating.
The utilization rate of general hazardous waste has increased, and the cost reduction of fly ash has increased significantly
In 2023, the company's hazardous waste disposal volume was +16.8% to 1.26 million tons, of which general hazardous waste disposal volume was +21.3% to 940,000 tons, and the utilization rate of disposal qualifications increased 2.6 percentage points to 31.1% year over year; sludge disposal volume was -35.3% to 64,000 tons, but this was offset by an increase in fly ash disposal volume (+51.8% to 72,000 tons over the same period). The average price for disposal of hazardous waste was -15.9% to 1,113 yuan/ton. Among them, the average price for disposal of general hazardous waste was -18.3% to 1,114 yuan/ton. This is the main reason for the decline in the average price of comprehensive disposal. Prices for disposal of sludge and fly ash are relatively stable. The fly ash business achieved remarkable results in cost reduction and efficiency. The tonne disposal cost was -20% to 877 yuan/ton, and the gross margin driving the sludge business was +18.5 pct to 31.0% year over year.
Competition in the hazardous waste disposal industry may still be fierce, and the company's core competitive advantage is still stable. Considering that the scale of hazardous waste disposal production capacity is still large, we believe that competition in the hazardous waste disposal industry may still face fierce competition in 2024. However, by further strengthening management and strengthening collaboration in cement production, the company sees that the overall operational quality of the project is still improving steadily. Combined with the company's rich disposal resources, we believe that the company's competitive advantage in the industry is still stable, and it is expected that it will continue to maintain a high gross profit margin while expanding its share. As high-cost disposal companies gradually withdraw from fierce competition, the competitive landscape of the industry is expected to be optimized.
Control capital expenses and actively expand non-kiln projects
The company's planned capital expenditure for 2024 is 760 million yuan, which is a contraction from the completion of 970 million yuan in 2023. New projects of 1.32 million tons/year were signed in 2023, and it is planned to sign 1.15 million tons/year of hazardous waste projects in 2024. The company's new 2023-2024 project plan covers specific solid waste markets such as sludge, fly ash, alternative fuels, resource recycling, and medical waste. We believe this will help the company expand its business boundaries, better target markets, avoid investing too early in the currently competitive field of collaborative disposal of cement kilns in the short term, and help enhance the overall benefits of the company's projects.
Risk warning: Aid growth falls short of expectations; hazardous waste regulation is weaker than expected; maintenance of strategic partners is weaker than expected.