Incident: In 2023, the company achieved operating income of 8.087 billion yuan, up 5.99% year on year; net profit to mother of 1,843 billion yuan, up 13.97% year on year; net profit after deducting non-return to mother of 1,804 billion yuan, up 14.65% year on year; weighted average ROE increased 0.38 pct year on year to 11.86% year on year.
Net profit attributable to mother also increased by 14%, and gross margin from operating operations increased. In 2023, the company's net profit growth rate exceeded the revenue growth rate, mainly due to the increase in operating revenue share and operating business profit margin level.
In 2023, the company's operating revenue accounted for 88.23%, up 2.20 pct, gross profit margin of 40.35%, and 1.88pct. By business, 1) Tap water: revenue of 2,443 billion yuan (+6%, same below), gross profit margin 44.46% (+0.18pct), sales volume of 1,068 billion tons (+5%), average price 2.29 yuan/ton (+1%); 2) Sewage treatment: revenue of 3.024 billion yuan (+14%), gross profit margin 40.15% (+1.68pct)), sewage treatment capacity 1,261 million tons (+6%), average treatment price 2.40 yuan/ton (+8%); 3) water supply and drainage network project: revenue of 952 million yuan (-11%), gross profit margin 22.15% (-1.45pct); 4) waste incineration: revenue of 701 million yuan (+3%), gross profit ratio of 40.23% (+2.27pct), incineration power generation capacity 966 million kilowatts (+4%); 5) leachate treatment: revenue 385 million yuan (+29%), gross profit margin 60.11% (+9.11%)), the amount of leachate treated 1.43 million tons (+5.15%); 6) sludge disposal: revenue of 339 million yuan (+8%), gross profit margin of 33.08% (+9.74pct); 7) reclaimed water and others: revenue of 243 million yuan (-19%), gross profit margin of 51.94% (+0.03pct).
Actively increase dividends, and expect an increase in free cash flow and dividend capacity after the peak of construction. In terms of cash flow, the company's net operating cash flow in 2023 was 3.389 billion yuan (+2%), with a net present ratio of 1.79 billion yuan; cash payments of 4.446 billion yuan (+6%) from the construction of fixed, intangible assets and other long-term assets. According to major projects under construction disclosed by the company, the total amount to be invested by the end of 2023 is 9.7 billion yuan. We expect to gradually invest over the next 2-3 years. In terms of dividends, the company paid 0.17 yuan per share in 2023, with a total dividend of 507 million yuan, with a dividend ratio of 27.53% (+6.86pct). The dividend ratio increased positively, corresponding to the 2023 dividend rate of 2.35% (corresponding to 2024/4/20).
The fifth phase of sewage treatment fees in the central city of Chengdu increased by 22%, bringing profit flexibility. According to the annual report, the provisional average sewage treatment service fee for the fifth phase of Chengdu (2024-2026) was 2.63 yuan/ton, an increase of 0.48 yuan/ton over the previous year, an increase of 22%. Refer to the average sewage treatment volume of 750 million tons in the central city of Chengdu in 2020-2022, the income tax rate of drainage companies is 15%. When the sewage treatment service price in central Chengdu increases by 0.48 yuan/ton, the profit increase due to price adjustments is about 300 million yuan. Compared with net profit returned to mother in 2023 The increase was approximately 17%.
Profit forecast and investment rating: The company has control of Chengdu's high-quality water solid waste assets, Chengdu's second and third circle integration+offsite expansion+environmental protection multi-dimensional layout. 1) Profit: As of the end of 2023, the scale of the company's water supply, sewage, reclaimed water, and waste incineration power generation projects was 430, 480, 110, and 12,000 tons/day, respectively. The production capacity under construction contributed to the increase in production capacity and operation, and the increase in sewage treatment fees in 2024 brought profit flexibility. 2) Cash flow: There is great potential to increase long-term free cash flow and increase dividends. Considering the increase in sewage treatment prices in 2024-2026, we increased the 2024-2025 net profit forecast from RMB 20.82/2,242 billion to RMB 22.24/2389 billion. The estimated net profit for 2026 is RMB 2,591 billion, +21%/7%/9% year-on-year in 2024-2026, corresponding PE is 9.7/9.0/8.3 times, maintaining the “buy” rating.
Risk warning: Project construction progress falls short of expectations, extended accounts receivable period, rising capital expenditure, etc.