Key points of investment:
The company occupies a high-quality location in Guangzhou. The project assets are excellent and scarce, and the actual controller background helps to renew the contract continuously. The company is the sole investor and operator of Guangzhou's waste incineration power generation project. It has a waste incineration production capacity of 32,000 tons/day, of which more than 30,000 tons/day production capacity is located in Guangzhou, accounting for about 94%. Relying on Guangzhou's high-quality regions, the company's project profitability, cash flow and business continuity have all performed better. The company's single size (about 2,300 tons/day) far exceeds the national average (1,040 tons/day), and the average price of waste incineration, biomass treatment, and tons of waste feed-in electricity are at the forefront of the industry. Guangzhou Environmental Investment Group, the controlling shareholder of the company, holds 72% of the shares. The actual controller is the Guangzhou Municipal People's Government, and future business renewals are more guaranteed.
The company currently has a capacity utilization rate of 71%. Currently, it is actively developing 80 million tons of stale garbage in Guangzhou, which is expected to improve performance without adding Capex. Affected by the addition of 12,000 tons of production capacity, the company's capacity utilization rate in 2023 was about 71%. The company actively broadened the sources of stored garbage and industrial solid waste, and increased capacity utilization. Stale garbage has characteristics such as large amount of residue, high ash content, and low calorific value. By mixing stale garbage, it is possible to increase land value, improve the environment, and increase the utilization rate of waste incineration production capacity.
Currently, Guangzhou has nearly 80 million tons of stale garbage to be excavated. The government has initiated relevant excavation plans. In 2023, the company will burn 650,000 tons of stale garbage. As future excavation progresses, the company's waste incineration capacity utilization rate and gross margin are expected to improve, thereby helping improve performance. In addition, the company's Guangzhou project can mix 30% of industrial solid waste, and is also expanding municipal sludge, which can further improve production capacity utilization.
Biomass: It accounts for 42% of Guangzhou's production capacity and works well with the waste incineration business. The company's biomass treatment mainly consists of food waste, and also disposes of biomass waste such as dead livestock and faeces. The company has 4 biomass treatment plants with a production capacity of 2,590 tons/day, accounting for 42% of Guangzhou's production capacity. In the future, the company is expected to expand new businesses such as biodiesel processing plants and carbon trading downstream.
The company's financial performance is good, capital expenditure has declined markedly, and the three-year plan clearly indicates that the dividend will not be less than 60%. The company's revenue and net profit CAGR for the past 4 years reached 25% and 56% respectively. In 2023, the company's revenue was 3.536 billion yuan, and net profit to mother was 735 million yuan. The company's gross margin has remained around 41-45% in the past two years, and the net profit margin has remained around 21%. As of the end of 2023, the company's balance ratio was about 67%, and ROE was 9%. Since the company's project was put into operation in 2022, capital expenditure has declined significantly. Net cash flow from operating activities reached 1.72 billion yuan in 2023, and the net present ratio reached 2.34 billion yuan. The company issued a 3-year dividend plan, making it clear that the dividend for 2023-25 will not be less than 60%, and the 2023 dividend rate will be about 64%.
Investment analysis: The company's net profit for 2024-26 is expected to be 910/10.88/1,311 million yuan, respectively, and YOY is 24%, 20%, and 21%. The current market value corresponding to the 2024-26 PE is 14/12/10 times that of the company. Referring to the average valuation level of comparable companies in 2024, taking into account the scarcity of waste incineration assets in Guangzhou, the company's growth, and the company's 60% high dividend background (the company's dividend rate in 2023 is about 3.6%, expected to be about 4.46% in 2024), we gave the company an 18-fold valuation in 2024, with a target market value of 16.4 billion yuan. Compared with the latest market value, we covered it for the first time, and gave it a “buy” rating.
Risk warning: the risk of not being able to fully absorb the new production capacity, the risk of declining revenue from the Li Keng factory, the risk of not being able to renew the company's project agreement after it expires, and the risk of declining national subsidies and bidding.