Key points of investment
Incident: In 2023, the company achieved main operating income of HK$32.09 billion, a year-on-year decrease of 14%, and realized net profit to mother of HK$4.429 billion, a decrease of 4% year-on-year.
The share of operation+financial revenue rose to 76% in 2023, and impairment in the green environmental sector dragged down profits. As the solid waste water industry enters a mature operation period, the scale of construction is shrinking year by year. Since operating and financial revenue surpassed construction for the first time in 2022, the revenue structure has continued to be optimized and profit margins have increased. In 2023, the company achieved construction, operation and financial revenue of HK$76.8, 191.8 and HK$5.23 billion respectively, a year-on-year decrease of 42%, an increase of 2%, and a year-on-year decrease of 2%. Operating and financial revenue accounted for 76%, an increase of 11 pcts year-on-year.
In 2023, the total loss of the company's accounts receivable, other receivables, contract assets, property, plant and equipment, intangible assets and right-of-use assets reached HK$1,158 million, of which the green environmental sector lost a total of HK$742 million. As a result, the net profit loss of the green environmental sector dragged down the overall net profit.
The balance ratio was reduced to 65%, and loan replacements saved interest expenses. At the end of 2023, the company's balance ratio was 65.37%, down 1.79pct. The company continues to reduce interest rates on domestic loans, replace high-interest loans from abroad in an orderly manner, and greatly reduce interest costs.
In 2024, biomass surcharges will be accelerated, and depreciation will boost profits & help improve cash flow. Everbright's Green Environmental Protection Notice 2024/1/1-3/8 received supplementary settlement notices for 16 biomass projects. The total settlement amount is about 1,534 billion yuan, and 1,377 billion yuan has already been paid.
Free cash flow is close to positive in 2023, and 2024 is expected to reach a positive point. The actual net operating cash flow after restoration in 2023 was approximately HK$7.5 billion, and capital expenditure was approximately HK$7.8 billion. The difference between the two narrowed sharply year on year, and free cash flow showed a marked positive improvement trend. The company set up an accounts receivable management team to strengthen assessments and take more measures to improve the level of accounts receivable repayment. The processing fee repayment situation improved sequentially in the second half of 2023. We expect net operating cash flow to rise in line with the growth of operating income. In 2024, the company's construction scale and capital expenditure will continue to decline, and free cash flow will reach a positive point.
The peak of solid waste leading construction has passed, operating growth has led to stable performance, and the decline in capital expenditure and free cash flow is being implemented logically. The solid waste leading scale. By the end of 2023, the company's environmental energy and green environmental protection sector had the largest waste incineration scale of 158,900 tons/day in the world. Among them, the waste incineration project in the environmental energy sector had been put into operation and 0.84 million tons/day under construction. The operating efficiency was leading in the industry. In 2023, the furnace generated 458 degrees, and the net network was 326 degrees, and heating provided incremental revenue. The impact of the decline in construction has been concentrated in 2022, and the accumulation of operating projects has consolidated the foundation for performance. Free cash flow is expected to improve in 2024, and endogenous dividend capacity will improve. Since 2017, dividends have remained around 30%, with a dividend rate (TTM) of 7.6% and PB 0.4, corresponding to 4 times PE in 2024. There is plenty of room for improvement in dividends and valuations compared to leading overseas WM (stable free cash flow, dividend ratio of about 50%, PE30+). (Valuation date: 2024/3/29)
Profit prediction and investment rating: The profit structure of leading solid waste companies has been optimized, and free cash flow is about to be corrected, which is expected to usher in valuation repair. Considering the progress of the company's project construction, we lowered our 2024-2025 net profit forecast from HK$46.74/4.923 billion to HK$44.68/4.564 billion. The estimated net profit to mother in 2026 is HK$4.697 billion, corresponding to 4/4/4 times PE, maintaining a “buy” rating.
Risk warning: extended accounts receivable period, rising capital expenditure exceeding expectations, risk of asset impairment, etc.