Incident: Recently, the company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 2.03 billion yuan, -9.91%; realized net profit attributable to mother/net profit of -2.16/ -311 million yuan respectively, and -4.48/- 503 million yuan respectively for the same period in 2022; net cash flow from operating activities was 517 million yuan, +236.88% year over year. In the first quarter of 2024, the company achieved operating income of 625 million yuan, +53.30% year-on-year; realized net profit to mother of 67 million yuan, +7224.30% year-on-year.

The reduction in business volume in the engineering sector has put pressure on revenue, and active optimization of the business structure has promoted a year-on-year improvement in performance. In 2023, due to various factors such as weakening market expectations, intense market competition, and the company's higher selection standards for engineering projects, the company's engineering sector's business volume decreased. Combined, the main business revenue scale declined (YOY -9.91%). Among them, revenue from comprehensive environmental management/professional technical services reached 11.27/168 million yuan, respectively, -15.12%/-21.00%. At the same time, the company's net profit improved year-on-year in 2023, mainly due to: 1) the company insisted on optimizing the business structure, strictly selecting and controlling the municipal engineering business, vigorously developing the industrial sector business, continuously increasing the share of equipment sales revenue, and promoting the audit and settlement of completed projects; 2) the company maintained steady growth in industrial order intake, and significantly improved volume and quality; 3) the company further promoted cost reduction and efficiency, while disposing of or withdrawing some projects with less than expected benefits.

Focus on high-quality orders in the industrial sector and further expand overseas markets. In 2023, the company further reduced municipal engineering projects, concentrated superior resources to vigorously develop the industrial sector business, and continued to expand overseas markets. In 2023, it obtained multiple single orders of more than 100 million yuan and dozens of individual orders over 30 million yuan, and obtained 1,547 billion yuan of industrial equipment supply orders throughout the year, including 1,211 billion yuan in overseas orders, +137.92% over the same period. Overseas market expansion continued to maintain a strong momentum. By the end of April 2024, the company had orders for the supply of handicraft equipment of about 1,918 billion yuan, with overseas orders of 1.37 billion yuan. The main customers were leading domestic and foreign paper companies. In the field of industrial water treatment and clean pulp production, the company basically achieved full coverage of the Southeast Asian business and maintained a high market share. At the same time, it also focused on the North American and South American markets, and achieved results in the market layout in Russia and Turkey. In the future, the company will further expand its overseas industrial market share and increase its business volume and industrial business revenue share.

Profit forecast: First coverage, giving the company an “gain” rating. We expect that in 2024-2026, the company will achieve operating income of 2,545/28.81/3.149 billion yuan and net profit to mother of 1.99/2.20/245 million yuan, corresponding PE of 12.67x/11.41x/10.26x, respectively.

Risk warning: Changes in the macroeconomic situation at home and abroad have exceeded expectations, acquisition and progress of project orders have fallen short of expectations, risk of impairment due to large balances of accounts receivable and contract assets, profit forecasts and valuation models fall short of expectations