Net profit returned to mother was in line with expectations and maintained a “buy” rating

Everbright Environment announced its 2023 results on March 27. In 2023, it achieved net revenue/return to mother of HK$32.0/ HK$4.429 billion, or -14.0/ -3.8% year over year. Net profit to mother was in line with Huatai's expectations (estimated at HK$4.305 billion). We expect net profit of 45.85/46.55/ HK$4.709 billion for 24-26, giving the company 5.9 times the predicted PE for 2024 (comparable to the company Wind's consistent expected average: 5.9 times), and the target price is HK$4.43 (previous value: HK$4.55, based on 6.5 times 2023E PE) to maintain “buying”.

Operating revenue accounts for 60%, improving operational stability

By business type, the company achieved operation/construction/financial revenue of HK$191.8/76.8/5.23 billion in 2023, up +2.2%/-41.9%/-2.2% year-on-year, accounting for 60/24/ 16% of total revenue (51/35/ 14% in 2022). For the first time, operating revenue reached 60%, further improving operating stability.

2023 gross margin +4.5pp to 43.0% year over year

Looking at the operating segment, the company's revenue for environmental energy/ green water/ green environmental protection in 2023 was HK$173.6/67.42 billion, down 21.0/0.3/7.8% year-on-year. The company's gross profit margin in 2023 was 43.0%, +4.5pp year-on-year, mainly due to an increase in operating service revenue with a high gross margin. As the share of operating services revenue increases, we expect the company's gross margin to continue to improve in 24-26.

Waste disposal volume +7% YoY, sewage treatment volume -1% YoY

In 2023, the company's environmental energy sector completed 48.6 million tons of garbage disposal, +7%, feed-in power, feed-in power, +5%; Environmental Water completed 1,749 million tons of sewage treatment, -1%; Green Environmental Protection completed 7.85 million tons of biomass treatment, -4% year-on-year, and 6.16 billion kilowatts of feed-in electricity, +2% year-on-year.

The annual dividend payout was HK22.0 cents, and the dividend ratio reached 7.2%

In 2023, it is proposed to pay a final dividend of HK8.0 cents per share and a full year dividend of HK22.0 cents, with a dividend ratio of 30.5%, corresponding to the dividend rate of 7.2% on March 29. According to the company's project construction progress, we expect that the increase in garbage disposal volume in 2024 is expected to increase operating cash flow, and the decline in the scale of projects under construction will lead to a contraction in capital expenditure, thereby further improving free cash flow and providing good support for the company's financial health and shareholder returns.

Risk warning: Construction service revenue declined more than expected, collaborative development of solid waste treatment fell short of expectations, and competition for biomass and hazardous waste disposal intensified.