Incident: The company recently released its 2023 annual report. In 2023, the company achieved operating income of 5.199 billion yuan, +43.65%; achieved net profit attributable to mother/ 913 million yuan, respectively, -9.79%/-13.61% year-on-year; net cash flow from operating activities was 604 million yuan, +100.16% year over year.
Water, solid waste, and engineering projects continue to be obtained, driving the company's revenue to grow rapidly. The company's revenue in 2023 was +43.65% year-on-year, achieving a gross profit margin of 20.16%, year-on-year -0.17pct. By business, the water sector achieved revenue of 1,338 billion yuan (YOY +24.22%) and achieved a gross profit margin of 26.25% (YOY-2.13pct). The revenue growth was mainly due to increasing the operation and maintenance of the integrated drainage plant network project in downtown Zhongshan; the engineering sector achieved revenue of 2,747 billion yuan (YOY +67.81%), achieving a gross profit margin of 10.23% (YOY+1.63pct) ). Revenue growth was mainly due to the continuous increase in revenue from new and continuing water pollution control projects and other projects; the solid waste sector achieved revenue of 578 million yuan (YOY +9.51%), achieving a gross profit margin of 30.23% (YOY+0.07pct), and revenue growth was mainly due to the addition of the Jinlia project.
Actively integrate water supply operators in Zhongshan City and continue to promote the expansion of sewage treatment capacity and layout optimization. In terms of water supply services, in 2023, the company focused on constructing a new “one game of chess” pattern of water supply, successfully integrating 10 water supply enterprises in Zhongshan City to basically unify the city's water supply operators. The company's daily water supply capacity reached 2.68 million tons, of which Zhongshan's water supply design and treatment capacity was 2.25 million tons/day, undertaking about 80% of Zhongshan's water supply tasks, and sold 41.6965 million tons of water throughout the year, +1.42% over the same period last year. In terms of sewage treatment, the company continues to implement the “Plant Network Integration” project to promote domestic sewage treatment capacity expansion, quality improvement and layout optimization. In 2023, the company's total sewage treatment design scale was 1.36 million tons/day, including 780,000 tons/day in Zhongshan; in 2023, it undertook the sewage plant expansion scale of 130,000 tons/day, accounting for 26% of the city's expansion scale in 2023.
Use industrial funds to enter the new energy market and complete the layout of industries such as photovoltaics, lithium battery materials, and energy storage. The company seizes opportunities to cultivate strategic new energy industries, enters the new energy market through mergers and acquisitions and industrial funds, and set up a 400 million yuan pre-REITS fund in 2023 to complete investments in a number of projects related to the new energy industry, involving photovoltaics, lithium battery materials and energy storage. The PV company and pre-REITS fund used distributed photovoltaic power plant construction as an entry point to complete a grid connection scale of 70 MWp, with a production capacity of 193 MWp under construction.
Profit forecast: Maintaining the company's “buy” rating. In 2024-2026, we expect the company to achieve operating income of 59.73/66.94/7.351 billion yuan and net profit to mother of 11.32/12.64/1,416 billion yuan, corresponding PE of 10.45x/9.36x/8.35x.
Risk warning: Changes in the macroeconomic situation at home and abroad have exceeded expectations, the rise in water prices has fallen short of expectations, business expansion has fallen short of expectations, the growth rate of the scale of new energy has fallen short of expectations, profit forecasts and valuation models have fallen short of expectations