Core views:
Production capacity was put into operation 24Q1, and the performance increased by 50%, and the current dividend rate was 2.3%. After the consolidation of the company, the company achieved revenue of 7.813 billion yuan (-0.5% YoY) and net profit to mother of 860 million yuan (+20.5% YoY) in 2023, of which 23Q4 accrued asset and credit impairment losses of 126 million yuan.
2024Q1 achieved revenue of 1,543 billion yuan (-4% YoY) and net profit of 418 million yuan (YoY +50%). The high profit increase was mainly due to the commercial operation of some sewage treatment and upgrading projects. The gross margin/net profit margin increased by 14.1/9.8 pct year-on-year to 47.2%/27.1%, and the operating cash flow of 16.87 million yuan was corrected. The balance ratio at the end of 2023 was 77%, and the size of accounts receivable reached 4.1 billion yuan (+96% year over year), which is expected to be mainly due to a large number of PPP projects entering the repayment period.
The 2023 dividend amount is 175 million yuan, the dividend ratio is 20.4%, and the current dividend rate is 2.3%.
The share of steady and high-margin sewage and sludge operations continues to rise, and the PPP scale is expected to shrink.
By business, PPP project revenue in 2023 was 4.907 billion yuan (-10.5% YoY), which has begun to show a contraction trend. We expect the PPP revenue scale to decline significantly starting in 2025.
After the consolidation of the purification company, it contributed 526 million yuan to net profit growth not attributable to the mother in 2023. The company's stable and high-margin operations such as sewage and sludge treatment achieved revenue of 21/438 billion yuan, an increase of 25.8%/36.2% year over year, and gross margin increased 5.3/15.7 pct year over year to 51.1%/30%. In 2023, the sewage treatment capacity was 944 million tons, the sludge treatment capacity was 680,000 tons, and the heating area was 6.55 million square meters.
The majority shareholders hold environmental protection assets such as water supply/incineration, and there is a large potential for integration. The majority shareholder, Zhengzhou Public Works, lays out the entire environmental protection industry chain. In addition to the sewage business, the group holds 1.73 million m3/day water supply capacity and 11,000 tons/day waste incineration production capacity. According to the bond collection prospectus, in the future, Zhengzhou Public Works will continue to acquire upstream and downstream environmental protection industry chains and obtain profits through spin-off, listing, transfer of property rights, and injection into listed companies.
Profit forecasting and investment advice. Net profit due to mother is expected to be 11.1/12.0/1.32 billion yuan in 2024-26, corresponding to 6.75/6.25/5.67 times the latest PE. The company has steady management of sewage assets in Zhengzhou. The majority shareholders still have room for integration, and the potential for dividends is outstanding. Referring to comparable companies, PE was given 10 times in 2024, corresponding to a reasonable value of 11.41 yuan/share, maintaining a “buy” rating.
Risk warning. Accounts receivable risk; water price adjustment risk; risk of projects under construction.