Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 7.813 billion yuan, -0.5% (adjusted), net profit to mother of 860 million yuan, +20.5% year on year (after adjustment); 2024Q1 achieved revenue of 1.54 billion yuan, -4.0% year on year, and net profit of 420 million yuan, +50.3% year on year.

In 2023, sewage treatment volume increased by 95% year-on-year, and the gross margin of PPP projects improved. The company completed major asset purchases in 2023 and acquired a purification company with a structure of 4.51 billion yuan, injecting high-quality sewage treatment assets and sludge treatment assets into the company. The main business advantage was more prominent. The annual sewage treatment volume was 944 million cubic meters, an increase of 95.0% over the previous year; the sewage treatment business revenue was 210 billion yuan, an increase of 25.8% (after adjustment), and the gross margin reached 51.1%, an increase of 5.3 pcts over the previous year. In terms of PPP projects, the company's annual PPP project revenue was 4.91 billion yuan, a year-on-year decrease of 10.5%, and gross margin reached 18.3%, an increase of 3.3 pct over the previous year.

2024Q1 performance exceeded expectations, and cash flow eventually improved. The 24Q1 company achieved net profit of 420 million yuan, the highest level in the first quarter of the year. We believe it was mainly due to a sharp increase in the company's gross sales margin. 24Q1's gross sales margin and net profit margin were 47.2% and 28.4% respectively, up 10.0 pct and 12.5 pct respectively from 23Q1. In terms of cash flow, since 21Q2, the company's net cash flow from operating activities has been negative for 11 consecutive quarters. In 24Q1, with the help of increased fiscal repayments, the net cash flow from the company's operating activities finally corrected to 16.87 million yuan, and operating risk improved markedly.

Investment advice and valuation: As a leading water company in Zhengzhou, the company's performance is expected to enter a rapid release period after the acquisition of a purification company. According to the company's 2023 annual report and quarterly report, we expect the company's 2024-2026 revenue to be 7.752 billion yuan, 7.888 billion yuan and 7.98 billion yuan respectively, with growth rates of -0.8%, 1.6%, and 1.3% respectively. Net profit to the mother is 1,099 billion yuan, 1,257 billion yuan and 1,354 billion yuan respectively. The growth rates are 27.8%, 14.4%, and 7.6% respectively, maintaining the “increase” “Hold” rating.

Risk warning: Higher risk of interest-bearing debt ratio, higher risk of accounts receivable, risk of water environment treatment investment falling short of expectations, risk of reduced sewage treatment costs.