Net profit due to mother in 2023 +14% YoY, raising profit forecast and target price
Xingrong Environmental released its annual report. In 2023, it achieved revenue of 8.09 billion yuan (+6% YoY), net profit to mother of 1.84 billion yuan (+14% YoY), and deducted non-net profit of 1.80 billion yuan (+15% YoY), all in line with the performance report.
Of these, Q4 achieved revenue of 2.40 billion yuan (-11% YoY) and net profit of 350 million yuan (+46% YoY).
Considering production capacity investment and slope climbing pace, sewage treatment service revenue was downgraded/raised for 24/25; considering the impact of price increases, the gross profit margin for tap water manufacturing and sewage treatment was raised. Raising the profit forecast, we expect the company's EPS for 24-26 to be 0.69/0.76/0.82 yuan, respectively (previous value 0.68/0.71/-yuan). Comparatively, the company Wind agreed to expect an average PE value of 12 times in 24 years, giving the company 12 times PE in 24 years, with a target price of 8.28 yuan (previous value 6.80 yuan). The company plans to pay a dividend of 0.17 yuan per share. The dividend ratio is +7pp to 28% year on year, and the current dividend rate is 2.5%. Maintain an “Overweight” rating.
Water supply: The commissioning of new projects led to revenue growth. Revenue from pipeline network engineering declined. The company disclosed that the operation and construction scale of the water supply project at the end of 23 was about 4.3 million tons/day. Among them, the third phase of Chengdu Plant 7 had a production capacity of 400,000 tons/day, which will significantly increase the scale of water supply operations after commissioning. The company's water supply revenue in '23 was +5.6% year-on-year, thanks to an increase in water supply capacity and an increase in average water prices of about 2 cents/ton; gross margin was +0.2pp to 44.5% year-on-year, mainly because revenue growth exceeded the rate of increase in raw material costs.
Pipeline engineering revenue was -10.7% year-on-year, mainly due to the year-on-year decline in the size of engineering orders. As new projects are put into operation and production capacity climbs, we expect water supply revenue to be +6.4%/6.3%/5.9% year-on-year in 24-26, and gross margin will remain relatively stable.
Sewage treatment: The commissioning of the new plant drove a sharp rise in volume and price, and gross margin rose slightly. The company disclosed that the sewage treatment project was in operation and construction scale of about 4.8 million tons/day at the end of '23, and that the scale of operation and construction of the reclaimed water utilization project was 1.1 million tons/day. Sewage treatment revenue in '23 was +13.7%, thanks to +5.5% year-on-year sewage treatment volume and +8% year-on-year treatment unit price; gross margin was +1.6pp to 40.1% year over year, mainly due to the year-on-year decline in pharmaceutical expenses. As projects under construction are put into operation one after another, we expect sewage treatment revenue to be +14.9%/13.3%/6.7% year-on-year in 24-26, and gross margin will remain relatively stable.
Environmental protection: The potential scale is considerable, and new food waste disposal projects have been added
The company disclosed a waste incineration power generation operation and construction scale of 12,000 tons/day at the end of '23, with a proposed construction scale of 2,400 tons/day; landfill leachate treatment operation and construction scale of 8,430 tons/day, sludge disposal operation and construction scale of 3,116 tons/day, and a proposed construction scale of 284 tons/day. Revenue from waste incineration power generation was +3.3% YoY; Revenue from landfill leachate treatment was +28.7% YoY, thanks to +5.1% YoY in treatment volume and +22.5% YoY in treatment unit price. Since '22, the company has obtained 1,950 tons/day of food waste disposal projects, with a total of 1,450 tons/day in operation and construction projects, further expanding the environmental segment. Considering the rise in production capacity, we expect waste incineration power generation revenue +2.9%/18.2%/12.6% YoY, and landfill leachate treatment revenue +18.3%/18.2%/15.4% YoY.
Risk warning: Risk of electricity prices falling from waste incineration; project commissioning progress falls short of expectations.