Description of the event
Hi-Energy Environment released its 2023 annual report and 2024 quarterly report. Revenue for 2023 was 10.58 billion yuan, up 20.58% year on year; net profit to mother was 505 million yuan, down 27.13% year on year; net profit after deducting non-return to mother was 442 million yuan, down 32.6% year on year. Among them, Q4 revenue was 3.09 billion yuan, up 19.6% year on year; net profit attributable to mother was 153 million yuan, which turned into a loss year on year.
2024Q1's revenue was 3.125 billion yuan, up 80.1% year on year; net profit to mother was 194 million yuan, down 5.95% year on year.
Incident comments
The recycling of solid hazardous waste contributed to major revenue increases in 2023 and 2024Q1. In 2023, revenue from solid hazardous waste recycling was 6.47 billion yuan, up 59.5% year on year; revenue from environmental protection operation services was 1.63 billion yuan, up 11.7% year on year; and revenue from environmental protection engineering was 2.48 billion yuan, down 23.8% year on year. Among them, there was a high increase in solid hazardous waste recycling revenue, mainly due to the fact that the Jiangxi Xinke Deep Processing Project was put into operation in 2023Q2, bringing about an increase of about 2,745 billion yuan in annual revenue; in addition, the Chongqing Yaohui, Gansu Jinchang, and Jingyuan Phase II projects are also estimated to have increased year-on-year (successive operations in the second half of 2022). 2024Q1 revenue increased 80.1% year-on-year, mainly because Jiangxi Xinke had not officially produced it in the same period last year, and production capacity was climbing in the first quarter of this year.
Profit for 2023 fell far short of expectations. The net interest rate in 2023 was 4.8%, down 3.7 pcts year on year; of these, the gross profit margin was 18.2%, down 5.34 pct year on year, mainly due to the 5.73 pct drop in gross margin of the solid and hazardous waste resource utilization sector. The Jiangxi Xinke Project continued to be in a state of technical reform after it was put into operation in 2023Q2. The output value of the project was high, but profits have not yet contributed, and the Chongqing and Jinchang project processes have not gone smoothly. They are also undergoing technical reform adjustments, dragging down profits. The cost rate for the period was 13.3%, a year-on-year decrease of 0.73 pct. Asset impairment losses of $78 million, a significant increase from $32 million in 2022 (inventory depreciation loss of $31 million, plus $19 million; goodwill impairment of $38 million, plus $21 million); most of these depreciations occurred in Q4. In addition, Q4 generated investment income of $0.28 billion, which is estimated to be mainly futures hedging losses.
The decline in net profit due to 2024Q1 is estimated to be mainly due to a decrease in futures hedging income. The high revenue increase in the first quarter and the year-on-year decline in profit were mainly due to the fact that the Jiangxi Xinke project was still in the technical reform stage in the first quarter, affecting profit release; at the same time, 2023Q1 futures hedging profits were high (net investment income of 0.24 million yuan, net income from fair value changes of 0.39 million yuan). This year, net income from Q1 investment was 0.12 billion yuan and net income from fair value changes was 0.07 billion yuan, which declined sharply this year.
Cash flow significantly improved expectations. The net cash flow from the company's operating activities in 2022 and 2023 was -446 million yuan and -953 million yuan. The negative cash flow was mainly due to increased procurement expenses due to Jiangxi Xinke's preparation, and the project was not fully produced, and there was little capital return; the net operating cash flow of 2023Q3-2024Q1 was 163 million yuan, 245 million yuan, and 100 million yuan, respectively. With the complete commissioning of the Jiangxi project, the company's cash flow is expected to improve significantly in the future. The capital expenditure for 2021-2023 was 1.98 billion yuan, 2.61 billion yuan, and 1.51 billion yuan respectively. Currently, there are few projects under construction, and capital expenditure is expected to continue to decline in the future.
Profit forecast and valuation: Hazardous waste recycling projects for high-energy environments in 2023 are still in transition. The Jiangxi Xinke, Chongqing Yaohui, and Gansu Jinchang projects all fell short of expectations at the beginning of operation and are undergoing continuous technical improvements; after 2024Q1, with the completion of Jiangxi Xinke and Chongqing Yaohui transformation, Jinchang Phase II was put into operation; it is expected that the company's Q2 net profit and cash flow will greatly improve; and the recent rise in copper and other metal prices will benefit the company. The estimated net profit for 2024-2026 is 1.02 billion yuan, 1.27 billion yuan, and 1.58 billion yuan, corresponding to PE valuations of 9.9x, 7.9x, and 6.4x. Maintain a “buy” rating.
Risk warning
1. The operational stability of hazardous waste recycling projects falls short of the expected risk; 2. The production capacity utilization rate falls short of the expected risk due to the low amount of hazardous waste collected.