Why are we promoting the big environment in the present moment?
Marginal improvement is expected in 2024, and the valuation inflection point is approaching. In the policy adjustment period after 2020, the market believes that lowering the national supplement will cause the profitability of the industry to decline, and that the company's cash flow performance is poor, accounts receivable are burdened, and liabilities are high, so valuations are suppressed.
The company's asset credit status is expected to improve in 2024 against the backdrop of accelerated payment of existing state supplements and the introduction of green certificates. As the company's investment decelerates, inventory is put into operation, operating income continues to rise, and free cash flow is positive. At that time, dividend ratio+EPS investment income can be obtained.
Everbright Environment: Leading waste incineration, a comprehensive platform with multiple business layouts. By the end of 2023, the company had a waste incineration operating capacity of 130,000 tons/day, ranking first in the industry. Since transforming the environmental sector in 2003, the company has gradually grown into the largest environmental enterprise in China and the world's largest waste-to-energy investment operator. As the flagship enterprise of Everbright Group's industrial investment in the environmental protection sector, it focuses on the three major fields of solid waste, floodwater, and clean energy. In the context of Group support, we improve operational efficiency through technological innovation and technological empowerment, focus on lean management, and promote cost reduction and efficiency.
New projects are slowing down and entering the stage of operational hematopoiesis
1) Environmental energy: Entering the county waste-to-energy market brings a certain battery life. By the end of 2023, 51.7% of production capacity was distributed in the third- and fourth-tier cities and county markets; 2) Environmental protection: sewage treatment volume and prices have risen sharply, and the compound growth rate of sewage treatment was 8.3% in 2017-2022. The average treatment unit price increased from 1.23 yuan/ton in 2017 to 1.71 yuan/ton in 2022; 3) Green environmental protection: As of 2023H1, 51 biomass comprehensive utilization projects were put into operation, and the heating transformation provided a good complement to cash flow.
The revenue, asset and liability structure continues to be optimized, and free cash flow is expected to improve in 2024 and the revenue structure continues to be optimized: operating revenue in 2022 surpassed construction revenue for the first time. 1) By business, environmentally friendly energy is the main contributor to gross profit. 2023H1 contributed 67.1% of gross profit with 56.0% operating revenue; 2) By type, since operating revenue surpassed construction revenue for the first time in 2022, the operating revenue ratio of 2023H1 has increased to 56.9%.
Asset credit is expected to improve: it is expected that the payment of existing state supplements will be expedited and the introduction of green certificates will be introduced. 1) Asset side: 2023H1's accounts receivable increased to HK$18.65 billion, and the share of accounts older than 13 months increased to 38%. In 2024, the normalization of national subsidies and the implementation of the green certificate for waste incineration are conducive to improving the company's asset credit status; 2) Debt side: The company continues to optimize its financing structure, and 2023H1 accounts for 77% of RMB debt. Subsequent capital expenditure is expected to decrease, and the balance ratio continues to decline.
Free cash flow is expected to improve: investment slows down, stocks are put into operation, and a return can be expected in 2024. The company's financing gap gradually narrowed as the scale of project investment decreased. The company's free cash flow in 2022 was -1.46 billion HK$1.46 billion, and environmental energy has been converted to HK$1.53 billion.
If the 2024 “active clean-up of government arrears” forecast continues to be fulfilled, the company's cash flow is expected to improve and rectify at an accelerated pace.
Cost-effective investment targets on the absolute return circuit
As the peak period of industry construction gradually passes, the company's 30% dividend ratio is expected to increase. The company has maintained a dividend ratio of around 30% in recent years, and the dividend rate increased to 6.88% in 2022, which is higher than that of peers. As of 2024/3/21, the company's dividend ratio was 7.72%. The undervaluation and high dividends highlight the cost effectiveness of the investment.
The company's net profit for 2023-2025 is estimated to be HK$40.37/40.53/HK$4,134 million, respectively, with year-on-year changes of -12.3%/0.4%/2.0%; corresponding PE valuations are 4.73x, 4.71x and 4.62x; free cash flow for 2023-2025 is -3.86/27.92/HK$4.718 billion, respectively, which can be corrected in 2024; giving the company a “buy” rating.
Risk warning
1. Risk of overdue accounts receivable; 2. Risk of receipt falling short of expectations; 3. Risk that profit forecasting assumptions are unfounded or fall short of expectations.