The decline in construction revenue dragged down performance and maintained a “buy” rating
Yuefeng Environmental Protection announced its 2023 results on March 26: Net revenue/profit to mother of HK$49.80/HK$1,001 billion, year-on-year, and net profit to mother was lower than our previous forecast of HK$1,094 billion. The main reason was the 74.9% year-on-year decline in construction service revenue and an increase in the exchange rate of the Hong Kong dollar against the RMB. We lowered our forecast for additional production capacity, and estimated net profit of HK$10.50/1,162/1,278 billion for 24-26 (the value of HK$1,2007/HK$1,336 million 24-25 years ago). Considering that most of the company's projects are located in Guangdong Province, the project quality and repayment conditions are good. The company was given 11.3 times the predicted PE for 2024 (comparable to the company Wind's consistent expected average: 8.7 times), and the corresponding target price was HK$4.86 (previous value of HK$5.40, corresponding to 12.0 times the predicted PE for 2023). Maintain a “buy” rating.
Construction revenue -77% YoY, garbage disposal volume +19% YoY
According to the nature of the business, the company's operation/construction revenue in 2023 was HK$39.62 billion, +2.0/ -76.7% year-on-year. In 2023, the Yixian and Huizhou projects were put into trial operation, adding 1,800 tons/day of operating capacity. At the end of 2023, the holding and joint venture projects had a production capacity of 5,4540 tons/day, of which 43690/10,850 tons/day were in operation/construction and planned. In terms of operating data, in 2023, we achieved 16.62 million tons of waste disposal, +18.7% year-on-year, and a power generation capacity of 6.218 billion kilowatts, or +18.4% year-on-year.
Actively explore new models to advance steam and VCS businesses
The company is also actively exploring new business models. At the end of 2023, 6 plants have launched steam supply services, and revenue increased 195.8% year over year. The Yingkou project (the first phase of 1,500 tons/day has been put into operation) was successfully registered on the Verified Carbon Standard (VCS) platform, and the company expects to reduce carbon dioxide equivalent emissions by 245,000 tons per year.
Sanitation revenue +51% year-on-year, winning bids for several representative projects
In 2023, the company's sanitation business achieved revenue of HK$342 million, +50.7% year-on-year. New orders were strong, and bids were won for a number of representative projects, including: 1) Quyang County Sanitation Service of $3,256 million, a 25-year project; 2) Hong Kong's North Lantau Waste Transfer Station and Outlying Islands Waste Transfer Facility contract with a contract value of HK$2,818 billion, with a project duration of 10 years; 3) Urban Stewardship Service Project in Anhui, with a contract value of 1.8 billion yuan and a service period of 25 years.
Accounts receivable +39% YoY, operating cash flow positive
At the end of 2023, the company's accounts receivable were HK$1,829 million, or +39.0% year-on-year. We believe this was mainly due to an increase in garbage disposal fees and national electricity supplements. The company's net operating cash flow for 22-23 was -248/HK$1,079 million. The capital expenditure for 22-23 was HK$3,905/1,462 million. Due to the reduction in the scale of projects under construction, we expect a year-on-year decline in capital expenditure in '24. The company plans to pay a final dividend of HK3.2 cents per share and a full year dividend of HK8.1 cents, with a dividend ratio of 19.7%, corresponding to a dividend ratio of 2.0%.
Risk warning: Construction revenue falls short of expectations, sanitation order growth falls short of expectations, and industrial collaboration falls short of expectations.