The target of high-quality waste incineration operations covered the “buy” rating for the first time. The Sanfeng environment is a leading enterprise in the waste incineration power generation industry. Ongoing projects are gradually being put into operation, garbage disposal and feed-in electricity are steadily improving, and the cash flow is expected to continue to improve, providing a solid foundation for shareholder returns. We expect the company's net profit from 2024-2026 to be 12.50/13.40/1,499 billion yuan. According to Wind's consistent expectations, the average PE value for 2024 is 13.5x. Considering the Sanfeng environmental operating index industry, strong profitability, large room for growth in equipment overseas, and high potential dividend ratio, the company will be given a PE 14.9x in 2024, corresponding to a total target market value of 18.6 billion yuan and a target price of 11.03 yuan. The first coverage was given a “buy” rating.
“Construction+operation+sales” opens up the entire industry chain. Net profit CAGR of 22% from 16-23 started in 1998. After going through “mixed reform” and “stock reform”, Sanfeng Environmental was listed on the main board of the Shanghai Stock Exchange in 2020. The business covers areas such as project operation, EPC construction, and sales of core equipment for waste incineration power generation. According to the 2023 annual report, the company has invested in 56 waste incineration projects (including shareholding), with a production capacity of 61,250 tons/day. The company grasped the historic opportunity for the development of the waste incineration industry, took advantage of the “construction+operation+sales” industry chain, and achieved long-term stable performance growth. The compound growth rate of operating revenue/net profit to mother reached 15/22% in 2016-2023, respectively.
The production capacity of A shares is third, and operating parameters are growing steadily
According to our statistics, in 2021-2023, the country's new waste incineration production capacity was 140/8.9/36,000 tons/day, and the total production capacity of the country reached 869,000 tons/day in 2023, achieving the “14th Five-Year Plan” target ahead of schedule. The industry development theme changed from investment-driven to operation as king. In 2023, the industry CR10 reached 64%, and Sanfeng Environmental Holdings put into operation a production capacity of 40 million tons/day, ranking third among A-share listed companies, and has high-quality project resources. In 2023, the company achieved 1404.09 tons of garbage entering the factory, +13.1% year-on-year, actual power generation/feed-in capacity of 55/ 4.83 billion kilowatt-hours, +9.4/9.6% year-on-year, and the Internet ratio reached 87.8%.
Free cash flow of 572 million yuan in 2023, potential dividend rate of 8.7% The company's net operating cash flow increased by 359% from $516 million to $2,372 million in 2015-2023, with a compound growth rate of 21%. The sales revenue rate/net cash ratio in 23 reached 107/195% respectively, and the main business profitability was strong. 2019-2021 was the peak period for the company's capital expenditure, with a peak of 2,696 billion yuan in 2021; capital expenditure was reduced by 37% to 1,691 billion yuan in 2022, and free cash flow was corrected for the first time. In 2023, free cash flow reached 572 million yuan, dividend payment ratio of 34%, and static dividend rate of 3.1%.
We estimate that under the assumption that all of the company's waste incineration projects are in operation and steady operation, the free cash flow may reach 1,925 billion yuan. Assuming that 60% of this is used for cash dividends, the cash dividend amount is 1,155 billion yuan, and the dividend rate corresponding to the market value of the latest closing date will reach 8.7%.
Risk warning: Potential dividend rates may be difficult to achieve in the short term, electricity price subsidies have been reduced or eliminated, garbage disposal fees and power generation revenue repayments are lower than expected, and the sharp decline in EPC construction revenue scale explains why profit predictions may not be established and why valuation and pricing may not be established.