Event: On the evening of April 25, 2024, Xingrong Environmental released its report for the first quarter of 2024. In the first quarter of 2024, the company achieved operating income of 1,846 billion yuan, an increase of 16.7% over the previous year; realized net profit of 457 million yuan, an increase of 20.55% over the previous year; net profit after deduction of 448 million yuan, an increase of 22.1% over the previous year.
Net cash flow from operating activities was RMB 18.3587 million, up 126% year on year; basic earnings per share were 0.1,539 yuan/share, up 20.61% year on year.
Comment:
Production capacity in the water supply & sewage business continues to be released, driving steady growth in performance. 2024Q1 achieved net profit of 457 million yuan, an increase of 20.55% over the previous year. We speculate that profits have increased due to the sequential release of water production capacity and the increase in sewage prices. By business structure, (1) Water supply business:
Currently, part of the production capacity already formed in the Chengdu Water Supply Plant 7 (Phase III) project is releasing contribution benefits one after another; at the same time, the company is actively integrating the water supply resources of the second and third layers to expand its business scale and competitiveness. (2) Sewage business: By the end of 2023, the scale of sewage treatment projects operated and under construction by the company was about 4.8 million tons, and the scale of reclaimed water utilization projects in operation and under construction was about 1.1 million tons/day, and it is expected that they will be released one after another. At the same time, in 2024, the price of the fifth phase of sewage treatment was 2.63 yuan/ton in the main urban area of Chengdu, and the gross profit per ton of sewage treatment increased by 0.48 yuan/ton, increasing the gross profit of the sector.
Profitability is enhanced and expenses are well controlled. 2024Q1's gross sales margin was 43.85%, up 1.67 pcts year on year; net sales margin was 25.38%, up 0.81 pct year on year. The cost rate for the period was 10.88%, a year-on-year decrease of 0.21pct. Among them, the sales expense ratio decreased by 0.42pct to 1.45%; the financial expense ratio increased by 0.98pct to 4.35%; and the management expense ratio decreased by 1.24pct to 5.08%, reflecting the continuous increase in the company's profitability and comprehensive management efficiency.
Net cash flow from operating activities increased 126% year over year, and the balance ratio remained at a reasonable level.
The net cash flow from 2024Q1's operating activities was 18.3587 million yuan, an increase of 126% over the previous year.
Mainly because the preferential VAT tax policy for sewage treatment services was changed from immediate collection and refund to a VAT exemption policy. Cash payments for the purchase and construction of fixed assets, intangible assets, etc. were 1.25 billion yuan, an increase of 48.4% year on year, resulting in net cash flow from investment activities of -1,332 billion yuan, a year-on-year decrease of 25.12%.
2024Q1's balance ratio increased 1.6 pct year over year to 60.03%.
Profit forecast and rating: Xingrong Environmental's performance stability and growth coexist. (1) Profitability:
The tap water & sewage business accounts for 100% of the main urban area of Chengdu, leading the profitability industry; (2) stability: the user payment model of the tap water business guarantees a stable inflow of cash flow, while the engineering business accounts for a small share, accounts for nearly 90% of operating assets, and has strong performance stability; (3) Growth: the company's current operation, construction and proposed water supply and drainage projects are about 9.3 million tons/day. We expect the production capacity under construction and proposed to be put into operation in 2024-2025 and beyond. At the same time, the company is actively expanding the second and third layers of water supply and drainage, which is expected to contribute to the water services market Performance growth.
Taking into account the company's current assets and future performance growth, we forecast that the company's 2024-2026 revenue will be 91.81/98.58/10.829 billion yuan, and net profit attributable to mother of 22.48/23.63/2,551 billion yuan, respectively. Based on the closing price on April 25, the corresponding PE will be 9.53x/9.07x/8.4x, maintaining the company's “buy” rating.
Risk factors: capacity expansion falls short of expectations, price adjustment process falls short of expectations, market expansion risk