Incident Overview: On April 25, the company released its 2023 annual report, achieving operating income of 10.580 billion yuan, a year-on-year increase of 20.58%; net profit to mother of 505 million yuan, a year-on-year decrease of 27.13%; net profit after deducting non-return to mother of 442 million yuan, a year-on-year decrease of 32.64%. A cash bonus of RMB 1.00 (tax included) is distributed for every 10 shares. The company released its report for the first quarter of 2024, achieving operating income of 3.125 billion yuan, a year-on-year increase of 80.10%, net profit to mother of 194 million yuan, a year-on-year decrease of 5.95%; net profit after deducting non-return to mother was 166 million yuan, a year-on-year decrease of 9.53%.

The increase in project preparation combined with production capacity to be released is under pressure: the company's solid waste and hazardous waste metal recycling market layout and integrated entire industry chain layout have basically been completed, and the total number of hazardous waste treatment licenses approved for the project is 785,400 tons/year. In 2023, the hazardous waste recycling sector achieved revenue of 6.468 billion yuan, a year-on-year increase of 59.50%; gross profit margin was 8.29%, a year-on-year decrease of 5.73 pcts. Mainly due to the successive commissioning of Jiangxi Xinke, which contributed 2,745 billion yuan in revenue in 2023, each production line is still in the phase of climbing capacity and has undergone many process upgrades, resulting in a low production capacity load. In addition, Chongqing Yaohui and Jinchang High Energy are affected by the receiving area, material structure, and production pace, etc., and production capacity utilization is insufficient, and profitability falls short of expectations. In April 2024, Jiangxi Xinke was fully put into operation, and Jinchang Hi-Energy Phase II was officially put into operation, further deepening the company's front-end and back-end integrated full-industry chain layout in the field of solid waste and hazardous waste resource utilization. With the gradual release of production capacity for key projects, the company's performance may reach an inflection point, and cash flow is expected to improve.

Environmental protection operations are progressing steadily and are expected to continue to contribute cash flow: in 2023, the company will operate 13 waste incineration power generation projects with a total production capacity of 11,000 tons/day; 7 hazardous waste harmless projects, with a total hazardous waste disposal license volume of 161,800 tons/year; medical waste disposal license volume 22 tons/day. In 2023, the company completed 4.5454 million tons of domestic waste treatment and 1,503 billion kilowatts of power generation. In 2023, environmental operation services achieved revenue of 1,628 billion yuan, an increase of 11.71% year on year, gross profit margin of 46.57%, and a year-on-year increase of 4.95pct. Mainly due to the company's new Yining project and expanding the external steam supply project, with the support of technological transformation and internal optimization, operational capacity has improved, and it is expected that it will continue to contribute cash flow to the improvement of the company's overall performance.

Investment advice: Affected by the increase in project preparation and low capacity utilization, the company's performance and cash flow are under pressure. It is expected to ease when the project enters full steady operation; the steady progress of environmentally friendly operations and continued improvement in profitability is expected to provide a safety cushion for the company's overall business development. Based on the company's operating conditions, the profit forecast for the company was adjusted. EPS for 24/25 is expected to be 0.57/0.73 yuan/share (previous value: 0.76/0.94 yuan/share), and the EPS for the new 26 years will be 0.83 yuan, corresponding to the closing price of April 25, the PE will be 11/9/8 times, respectively. Considering the release of the company's additional production capacity, the target price is 7.98 yuan/share, and the target price is 7.98 yuan/share, maintaining a “careful recommendation” rating.

Risk warning: industry policy risks; increased industry competition; price fluctuations of raw materials and products.