Description of the event
Xingrong Environmental released its 2024 quarterly report. 2024Q1 achieved revenue of 1,846 billion yuan, up 16.7% year on year; net profit to mother of 457 million yuan, up 20.6% year on year; net profit after deducting non-return to mother was 448 million yuan, up 22.1% year on year.
Incident comments
The introduction of new production capacity, climbing the slope, and the implementation of price adjustments in the sewage business led to an increase in performance. 1) 2024Q1's revenue increased 16.7% year on year; net profit to mother increased 20.6% year on year. The increase in net profit to mother was higher than the increase in revenue mainly due to the increase in gross margin. The company's gross margin was 43.85%, +1.67 pct year on year. It is estimated that operating business was the main increase. 2) Production capacity: In 2023, the company put into operation projects such as Chengdu Seventh Reclaimed Water Plant Phase II (500,000 tons/day), Chengdu Gaoxin West District No. 2 Sewage Treatment Plant (8 tons/day), and Pengzhou Industrial Sewage Treatment Plant Phase I (8 tons/day). Production capacity climbing led to revenue growth and unit cost dilution. 3) Sewage business price adjustment implementation: The company's central urban area of Chengdu accounts for 59.6% of production capacity (the latest 2022 data available), and the sewage treatment service fee for the fifth phase of Chengdu (2024-2026) was raised from 2.15 yuan/ton to 2.63 yuan/ton, driving revenue growth and increased profitability. 4) The cost rate for the period was 11.11%, a year-on-year decrease of 0.04pct, and was basically stable; of these, the management expense ratio was 5.08%, a year-on-year decrease of 0.62 pct; the financial expense ratio was 4.35%, an increase of 0.49pct over the previous year, mainly due to the operation of related projects under construction, interest stopped capitalization, and interest expenses increased. 5) Dragged down items: Credit impairment losses were $54.6 million, compared to 20.49 million yuan in the same period last year, presumably due to a slowdown in repayments by some local governments.
The payout ratio declined slightly. 1) The payout ratio was 86.24%, down 2.42pct from the previous year. It is estimated that due to the slowdown in repayments by some local governments, the decline was within the normal fluctuation range. 2) Net cash flow from operating activities was 0.18 million yuan, which was corrected year-on-year, mainly due to the adjustment of value-added tax on sewage treatment services for drainage companies to be exempt from VAT during the same period last year. At the same time, undeductible input tax amounts were calculated based on the net value ratio for real estate that had already been deducted from input tax, leading to an increase in VAT surcharges in the previous period, and there were no such matters in 2024Q1; Q1 over the years was all seasonal low in net cash flow from operating activities, which is presumed to be mainly due to seasonal issues with government payments. 3) 2024Q1 paid a total of 1.25 billion yuan in cash for the purchase and construction of fixed assets, intangible assets and other long-term assets, which will support the company's continued business growth in the future.
Looking ahead to 2024, the company's sewage price adjustments will increase profits, and ongoing projects will be put into operation, and offsite expansion will support performance growth. 1) The estimated increase in sewage treatment service fees in central urban areas of Chengdu has increased sewage treatment business performance by more than 127 million yuan. 2) By the end of 2023, the scale of the company's operating, ongoing and proposed water supply and drainage projects was about 9.3 million tons/day, the scale of the reclaimed water utilization project was about 1.3 million tons/day, the waste incineration power generation scale was 14,400 tons/day, the scale of the sludge disposal project was about 3,400 tons/day, the scale of the garbage leachate treatment project was 8,430 tons/day, and the scale of the food waste disposal project was 2,150 tons/day. Existing production capacity continues to climb, and production capacity under construction will be put into operation one after another. 3) Actively expand the second and third tier market in Chengdu. It is estimated that if integrated into the surrounding area of the capital, it will increase the scale of water supply by about 1.64 million tons/day and increase in sewage treatment by 1.17 million tons/day (there is uncertainty about the extension).
The dividend ratio increased in 2023. The dividend ratio in 2023 is 27.5%, up 6.86pct from 2022, and the dividend rate is 2.37% (2024/04/25). If the urbanization of Chengdu progresses to a certain stage in the future, the company's dividend ratio still has room to increase.
The company mainly operates a business, grows through steady accumulation of performance, and has good cash flow. It is an absolute revenue target for high quality. The company's net profit for 2024-2026 is estimated to be 21.4/23.4/2.55 billion yuan, +16.1%/+9.5%/+8.9% year-on-year, corresponding to PE10.0x, 9.14x, and 8.39x, maintaining a “buy” rating.
Risk warning
1. Price and charge risk; 2. Risk that project progress falls short of expectations.