Event: On the evening of April 18, 2024, Xingrong Environmental released the 2023 Annual Report. In 2023, the company achieved operating income of 8.087 billion yuan, an increase of 5.99% over the previous year; realized net profit of 1,843 billion yuan, an increase of 13.97% over the previous year; net profit after deduction of 1,804 billion yuan, an increase of 14.63% over the previous year. Net cash flow from operating activities was $3.389 billion, up 2.22% year on year; basic earnings per share were 0.62 yuan/share, up 13.98% year on year. In the fourth quarter of 2023, the company achieved operating income of 2,396 million yuan, a year-on-year decrease of 10.87% and an increase of 8.36% month-on-month; realized net profit to mother of 353 million yuan, an increase of 45.64% over the previous year. In 2023, it is planned to pay 1.7 yuan (tax included) for every 10 shares to all shareholders. The dividend rate is 2.48% based on the closing price on April 18, and the dividend ratio is about 28.13%, an increase of 7.46 pcts over the previous year.
Comment:
The volume and price of the water supply & sewage business have risen sharply, and the steady rise in gross margin of the sector reflects operational resilience. By business structure, (1) Water supply business: in 2023, the company sold 1,068 billion tons of water, up 4.6% year on year; achieved revenue of 2,442 billion yuan, up 5.6% year on year; gross margin was 44.5%, up 0.5 pct year on year, mainly due to part of the production capacity already formed in the Chengdu Water Supply Plant 7 (Phase III) project releasing contribution revenue one after another; the unit price of water supply was 2.29 yuan/ton, an increase of 0.02 yuan/ton over the previous year. We estimate that the price of water supply per ton fluctuated mainly due to changes in the water sales structure; the cost of water supply for a single ton was 1.27 yuan/ton, an increase of 1.27 yuan/ton year on year. 0.01 yuan/ton, mainly due to rising raw material costs. (2) Sewage business: In 2023, the company's sewage treatment capacity was 1,261 billion tons, up 5.5% year on year; achieved revenue of 3,023 billion yuan, up 13.7% year on year; gross margin was 40%, up 1.7 pct year on year, mainly due to the continuous commissioning of sewage production capacity under construction. The comprehensive price of sewage treatment was 2.4 yuan/ton, up 7.8% year on year. We estimate that the comprehensive price increase was driven by the merger of new production capacity and price adjustments for offsite projects; the cost of sewage treatment per ton was 1.43 yuan/ton, up 4.9% year on year, mainly due to the 15.5% increase in energy and power costs.
(3) Environmental protection business: The company's waste incineration power generation capacity was 966 million kilowatts, up 4.2% year on year; gross profit margin of 0.29 yuan, up 0.08 yuan/degree year on year, sector gross profit margin 40%; garbage leachate disposal volume of 1.43 million tons, driving cost reduction to 162 yuan/ton, sector gross profit margin 60%; sludge disposal volume of 690,000 tons, sector gross margin increased by 10pct to 33%.
Sewage prices in the main urban area of Chengdu increased by 22.3%, which is expected to significantly increase performance. The price of the company's fifth phase sewage treatment fee is tentatively set at 2.63 yuan/ton, an increase of 22.3% compared with the sewage treatment price currently implemented in Chengdu of 2.15 yuan/ton. The settlement price was determined taking into account factors such as rising investment costs and increased operating costs. The increase in the company's new acquisitions in recent years has led to an increase in single-ton treatment costs, which has contributed to the rise in sewage treatment prices. The production capacity of sewage assets in Chengdu is about 2.54 million tons/day, accounting for about 58% of the company's total operating capacity. Sewage price adjustments are expected to increase gross profit.
Endogenous epitaxial growth in tap water is equally important. Chengdu's population and economy are growing rapidly, supporting a steady increase in the company's water sales volume. The company is currently constructing seven plants (phase III) of 800,000 tons/day, and we expect to release production capacity one after another in 24-25 years. At the same time, the parent company, Chengdu Environmental Group, is actively implementing the integrated water supply reform of Chengdu's “clean water supply and discharge management” and integrating water supply resources in the second and third circles. As the group's core listed company, Xingrong Environmental has set up a joint venture with the Pidu District Government to cooperate in investment in water supply and drainage facilities and operations. On April 11, the company issued an announcement to review and pass a bill to cooperate with the Wenjiang District Government in water supply. We believe that the water supply reform in Chengdu is progressing steadily, and the company is expected to integrate water assets and expand its business scale and competitiveness in the reform.
Profit forecast and rating: Xingrong Environmental's performance stability and growth coexist. (1) Profitability:
The tap water & sewage business accounts for 100% of the main urban area of Chengdu, leading the profitability industry; (2) stability: the user payment model of the tap water business guarantees a stable inflow of cash flow, while the engineering business accounts for a small share, accounts for nearly 90% of operating assets, and has strong performance stability; (3) Growth: the company's current operation, construction and proposed water supply and drainage projects are about 9.3 million tons/day. We expect the production capacity under construction and proposed to be put into operation in 2024-2025 and beyond. At the same time, the company is actively expanding the second and third layers of water supply and drainage, which is expected to contribute to the water services market Performance growth.
Taking into account the company's current assets and future performance growth, we forecast the company's revenue for 2024-2026 to be 91.81/98.58/10.829 billion yuan, and net profit attributable to mother of 22.48/23.63/2,551 billion yuan respectively. Based on the closing price on April 18, corresponding to PE of 9.11x/8.67x/8.03x, we are optimistic about the company's steady growth capacity and dividend potential, and maintain the company's “buy” rating.
Risk factors: capacity expansion falls short of expectations, price adjustment process falls short of expectations, market expansion risk