Event Overview: On March 28, the company released its 2023 annual report. In 2023, it achieved operating income of 6.027 billion yuan, up 0.06% year on year; net profit to mother was 1,166 billion yuan, up 2.33% year on year; net profit after deducting non-return to mother was 1,138 billion yuan, up 1.92% year on year; and 2.35 yuan (tax included) for every 10 shares. In the fourth quarter, the company achieved operating income of 1,488 billion yuan, a year-on-year decrease of 15.58%; net profit to mother was 181 million yuan, a year-on-year decrease of 35.10%; net profit after deducting non-return to mother was 184 million yuan, a year-on-year decrease of 33.09%.

Projects have improved quality and efficiency, and abundant cash flow: By the end of 2023, the company had 56 waste incineration power generation projects with a total production capacity of 61,250 tons/day. Among them, the wholly-owned and controlled projects had a design scale of 44,200 tons/day, with a production capacity of 3,9950 tons/day already in operation, and an additional test operation capacity of 2,300 tons/day (including equity participation).

In 2023, the wholly-owned and controlled project treated 14.409 million tons of household waste, an increase of 13.06% over the previous year. According to estimates, the comprehensive capacity utilization rate reached more than 96%; achieved a total power generation capacity of about 5.5 billion kilowatts, with an average plant electricity consumption rate of 12.28% (excluding heating projects), leading the industry; the average amount of waste generated per ton entering the factory reached 424 deg/ton (excluding heating, etc.), maintaining a high position. It is worth noting that in 2023, the company's wholly-owned and controlled projects sold 790,500 tons of steam, an increase of 27.8% over the previous year. The company's net cash flow from operating activities in 2023 was 2,372 billion yuan, up 21.69% year on year. Of these, in the fourth quarter, net cash flow from operating activities was 1,269 billion yuan, up 61.66% year on year.

Overseas equipment sales welcomed breakthroughs, adding momentum to the water treatment business: In 2023, the company's equipment sales business achieved revenue of 957 million yuan, an increase of 115.62% over the previous year. The subsidiary Sanfeng Cavanta signed 14 supply contracts, with a total design and treatment capacity of about 12,000 tons/day, including projects such as Thailand's Saraburi Phase V, Thailand's Nakhon Pathom Province, Vietnam's Selangor State, etc., with a total treatment capacity of 7,200 tons/day, with a total contract amount exceeding 600 million yuan; the subsidiary Sanfeng Technology signed 31 sewage treatment and direct drinking water equipment supply (EPC) contracts, involving a total sewage treatment capacity of 32,800 tons/day, to achieve market transformation of direct drinking water equipment technology achievements. Breakthroughs in overseas markets and water treatment business are expected to drive the company's performance growth.

Investment suggestions: The company has maintained a good repayment trend and sufficient cash flow; incineration production capacity has been put into operation in an orderly manner, and operational efficiency has improved; breakthroughs have been made in overseas equipment sales, and the water treatment business provides growth potential. Based on the company's operating conditions, the company's profit forecast was adjusted. It is estimated that the company's 24/25 EPS will be 0.78/0.85 yuan/share (previous value: 0.85/0.93 yuan/share), respectively, adding a 26-year EPS forecast value of 0.90 yuan/share, corresponding to the closing price of the PE on March 28, 2024 being 10/9/9 times, respectively. Considering the stable operation of the company's project and breakthroughs in overseas markets, the company will be given 12.0 times PE in 2024. The target price is 9.36 yuan/share, maintaining a “careful recommendation” rating.

Risk warning: The progress of project construction and operation falls short of expectations; risk of slowing industry growth; risk of slowing down the pace of inclusion in the national supplement catalogue; risk that major solid waste business development falls short of expectations.