Key points of investment:
Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company's revenue was 10.580 billion yuan, yoy +20.58%, and net profit to mother was 505 million yuan, yoy -27.13%. Performance fell short of expectations.
Resource sector: Multiple factors affected earnings in 2023, falling short of expectations. The Xinke project was put back into operation in April 2024. Yaohui Technology Reform and Jinchang Light Equipment went to the market, and the performance is expected to increase in 2024. The sector's revenue in 2023 was 6.468 billion yuan, yoy +59.50%, and gross margin decreased by 5.73 percentage points. Revenue growth is mainly due to the gradual commissioning of the Xinke project (contributing revenue of 2,745 billion yuan in 2023); the gross margin decline is mainly due to: the Xinke project has the characteristics of high output value and low gross margin level. At the same time, Xinke is in the production capacity climbing stage, and environmental protection equipment has undergone many process upgrades during this period, which affected the production time and capacity load of the production line; in addition, the Chongqing Yaohui Project was affected by the receiving area, material structure, etc., and the profit achievement fell short of expectations; the Jinchang High Energy Deep Processing Line was put into operation longer than expected, and the production capacity utilization rate was insufficient. Due to the impact of falling palladium prices, disposal capacity and profitability fell short of expectations.
Environmentally friendly operation: Waste incineration is the main body, and the operation is stable. The sector's revenue in 2023 was 1,628 billion yuan, yoy +11.71%, and gross profit margin was 46.57%, an increase of 4.95 percentage points over the previous year. The increase in revenue was mainly due to additional operating revenue from the waste incineration power generation project in Yining. In addition, various waste incineration power generation projects are actively expanding external steam supply projects, broadening revenue sources. The increase in gross margin is mainly due to waste incineration power generation projects actively carrying out technological transformation and upgrading and optimizing internal management on the basis of ensuring smooth operation, and the effect of reducing costs and increasing efficiency is obvious.
Environmental engineering: Strategy shrinks, and the share is gradually decreasing. The sector's revenue in 2023 was 2,484 billion yuan, yoy -23.84%, and gross profit margin 25.51%, a year-on-year decrease of 1.85 percentage points. With the transformation and implementation of the company's overall strategy, the share of engineering business in the overall business gradually declined. In 2023, the environmental engineering sector signed a total of 3.123 billion yuan in new orders, yoy +6.40%.
Inventories were greatly increased to guarantee raw materials, and cash flow gradually improved from 23Q3. At the end of 2023, the company's net cash flow from operating activities was 953 million yuan, yoy -113.63%, mainly due to the sharp increase in the company's inventory during the same period to 4.931 billion yuan (2,638 billion yuan in 2022). Among them, Jiangxi Xinke gradually started production at the end of March 2023, adding 455 million yuan in raw materials for electrolyzer underlayment and normal production. Furthermore, with the extension of the production chain, the company's operating cash flow gradually improved from the third quarter.
Investment analysis opinion: The profit of the company's 2023 resource-based project falls short of expectations, but looking ahead to 2024, the company's above projects are expected to see significant profit improvements. At the same time, considering that copper prices have recently entered an upward channel, the company's inventory and operations are expected to directly benefit, and the company's profit is expected to be repaired. For conservative reasons, we lowered the company's 2024-25 profit forecast to 1,030/1,196 billion yuan (1.88/1,466 billion yuan before the reduction), and added the 2026 profit forecast to 1,306 billion yuan, corresponding PE of 10, respectively /9/8, downgraded to “gain” rating.
Risk warning: Resource-based business capacity falls short of expectations; market competition intensifies; risk of fluctuations in raw materials and product prices.