Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 3.18 billion yuan, a decrease of 5.14% over the same period of the previous year (adjusted), a net profit of 603 million yuan, a decrease of 17.13% compared to the same period of the previous year (adjusted), a net profit of 11.74% less than the same period last year (adjusted). The basic income per share was 1.4 yuan/share, and a cash dividend of 3 yuan (tax included) for every 10 shares; in the first quarter of 2024, the company achieved operating income of 786 million yuan Yuan, down 9.08% year-on-year from the same period last year, net profit to mother was 181 million yuan, up 10.69% from the same period of the previous year, net profit after deducting non-return to mother was 181 million yuan, an increase of 11.41% over the same period of the previous year (adjusted), and basic earnings per share were 0.42 yuan/share.

The garbage disposal sector is operating steadily, and the kitchen sector is growing steadily. According to the company's announcement, in 2023, the company's waste incineration power generation project had a cumulative power generation capacity of 2,922 million kilowatts, a cumulative feed-in electricity price of 0.54 yuan/kilowatt hour (excluding tax), and a cumulative garbage storage volume of 9.2369 million tons; the domestic waste sector operated steadily, with revenue of 2,218 billion yuan, an increase of 5.31% over the previous year. By the end of '23, the company had invested and built a total of 22,920 tons of domestic waste incineration power generation projects in 9 provinces including Zhejiang, Hubei, Sichuan, Henan, Anhui, and Guangdong. Of these, 21,220 tons had been put into operation, 700 tons (Dingxi Environmental Protection), and 1,000 tons (South Taihu Lake Phase V) were under construction.

In 2023, the company processed 738,300 tons of food waste, an increase of 19.16% over 619,600 tons in the same period last year; a total of 26,800 tons of oil was extracted, up 30.73% from 20,500 tons in the same period last year; and operating income was 363 million yuan, up 11.63% year on year. By the end of '23, the company had invested in and built a total of 3,320 tons of food waste projects in six provinces including Zhejiang, Anhui, Henan, Shandong, Jiangsu, and Hubei. Of these, 2,650 tons had been put into operation, 160 tons were put into trial operation, and 510 tons of kitchen projects were being built.

Quality and efficiency were further improved, and the prices of the six projects were successfully adjusted. The company further improved quality and efficiency. In terms of price increases: in 2023, the garbage disposal fee for the company's six projects was successfully adjusted. Among them, the South Taihu Lake environmental protection project was raised from 100 yuan/ton to 155 yuan/ton, an increase of 55%; the Changge Wangneng project was raised from 60 yuan/ton to 80 yuan/ton, an increase of 33%; the Wangneng project was raised from 58 yuan/ton to 68 yuan/ton; the Taizhou Wangneng project increased 17% from 58 yuan/ton to 68 yuan/ton. 83 yuan/ton increased to 103 Yuan/ton, an increase of 24%; the Panzhihua Wangneng Project was raised from 38.49 yuan/ton to 42.55 yuan/ton, an increase of 11%. Technical aspects: The company's South Taihu Lake Phase V uses ultra-high pressure reheating technology. The overall thermal efficiency was increased from 22% to 30%, and the power generation capacity of tons of waste was increased from 350 to 700. It is the first single-unit ultra-high pressure reheating project in the country; in addition, the company gradually implemented oil refining technology in Huzhou Ecology, Suzhou Huayijie, Luoyang Ecology, Anji Ecology, and Bengbu Ecology. The overall oil extraction rate increased by 0.14%. Each 0.1% increase in oil production is equivalent to an increase of 520 tons of oil. We believe that as the operation level of the company's projects improves and the projects under construction are put into operation, the company's waste incineration and kitchen sector performance will steadily improve.

Affected by lithium battery prices, the lithium battery recycling business is under pressure in the short term, and the rubber recycling business is worth looking forward to. The lithium battery industry has changed dramatically. Due to the imbalance between supply and demand, lithium carbonate fell from more than 500,000 per ton at the beginning of 2023 to less than 100,000 per ton at the end of 2023. Prices of cobalt sulfate, nickel sulfate, etc. continued to be sluggish, and the price of cascade batteries also declined. In order to cope with the impact of price fluctuations, the company's lithium battery recycling business adopted a production model with less self-production and multi-generation processing. The total production output of Lixin New Materials Co., Ltd.'s cobalt-nickel self-production and processing output for the whole of 2023 was 1,779.38 gold tons, a year-on-year decrease of 65.45%; The estimated inventory price reduction of 80 million yuan and the calculation of goodwill impairment put pressure on the company's lithium battery business in the short term. In the recycled rubber sector, the Nantong Huili Phase I 30,000 ton butyl reclaimed rubber production line has been officially put into operation. The second phase production line containing 50,000 tons of butyl reclaimed rubber, 40,000 tons of recycled tire rubber, and 15,000 tons of vulcanized rubber powder has entered trial operation; the revenue of the recycled rubber sector in '23 was 103 million yuan, an increase of 506.68% over the previous year. With the further release of subsequent production capacity, the rubber recycling business is expected to contribute additional volume.

Investment advice and valuation: The company's main garbage disposal business is developing steadily. Although the lithium battery recycling business is under pressure in the short term, the rubber recycling sector is worth looking forward to. We expect the company's revenue from 2024 to 2026 to be 3.465 billion yuan, 3.701 billion yuan, and 3,997 billion yuan respectively, with growth rates of 9%, 6.8%, and net profit attributable to mother of 720 million yuan, 794 million yuan, and 859 million yuan respectively. Growth rates are 19.4%, 10.2%, and 8.2% respectively. Corresponding PE is 8.37X, 7.6X, and 7.02X respectively, maintaining a “buy” investment rating.

Risk warning: Project progress falls short of expectations; risk of electricity price reduction; fluctuating metal prices; policy progress falls short of expectations; lithium battery recycling market falls short of expectations.