Key points of investment

Water treatment technology solution projects slowed in 2023, and medium- to long-term business revenue grew steadily, with on-hand orders rising 27% to 736 million yuan. In 2023, the company had revenue of 573 million yuan (-14.63%, same below), net profit to mother of 0.71 million yuan (-7.83%), gross sales margin of 39.14% (+5.03pct), net sales profit margin of 12.78% (+1.42pct), net operating cash flow of 110 million yuan (+30.19%), and on-hand orders of 736 million yuan (+27.46%) as of the end of 2023. 1) By business type: ① Water treatment technology solutions: revenue of 378 million yuan (-24.36%), accounting for 66.05% of total revenue, gross profit margin of 41.24% (+6.10pct). ② Medium- and long-term business: Revenue of 194 million yuan (+13.74%), accounting for 33.85% of total revenue, including production and sales revenue of wastewater recycling products of 107 million yuan (+11.99%), gross profit margin of 33.51% (+6.56pct), mainly due to the subsidiary Yuanping Zhonghe Water received 9.8 million yuan in water differences from customers; operation and maintenance technical service revenue of 86 million yuan (+15.98%), gross profit margin 36.53% (+0.12pct), mainly due to an increase in project settlement water volume. 2) By service industry: To B business revenue of 311 million yuan, accounting for 54.36% of total revenue; To G business revenue of 261 million yuan, accounting for 45.54% of total revenue. 3) By service sector: revenue from wastewater recycling is 469 million yuan, revenue from high-quality drinking water is 103 million yuan.

2024Q1's revenue also increased 26% to 110 million yuan, and net profit attributable to mother also increased 16% to 190 million yuan.

2024Q1 gross profit margin of 34.79% (+2.19pct), net sales margin 9.51% (+0.17pct). 1) By business type: ① Water treatment technology solutions: Revenue of 51 million yuan (+9.22%), accounting for 45.74% of total revenue. ② Medium- to long-term business: Revenue of 60 million yuan (+44.58%), accounting for 54.26% of total revenue. It is mainly due to the increase in water treatment capacity of subsidiary water plants and the commissioning of new water plants. 2) By service industry: To B business revenue of RMB 35 million, accounting for 31.31% of total revenue; To G business revenue of RMB 76 million, accounting for 68.69% of total revenue. The new water treatment technology solutions added to 2024Q1 are all To-G businesses. 3) By service sector: Sewage wastewater recycling revenue of 71 million yuan, revenue from advanced drinking water treatment of 40 million yuan.

As of 2024Q1, on-hand orders also increased 15.76% to 688 million yuan, with B-side orders growing strongly. 1) Classification by business type: on-hand orders for water treatment technology solutions/sewage and wastewater resource products/operation and maintenance technology services, -11.45%/+27.54%/+79.69%, respectively; 2) By service industry classification: ToB and ToG business on-hand orders were 342 million yuan (+20.98%) and 346 million yuan (+11.03%), respectively; 3) By business area: sewage wastewater recycling, on-hand orders for high-quality drinking water, 582 million yuan (+40.25%), 1.05 billion yuan (-41.10%).

Water resource experts released the new Mizushima & Blue Ocean to further cultivate reclaimed water. The company is deeply involved in advanced water treatment and recycling, digital & commercialization application upgrades, and released the “New Water Island” product. It covers only 1/6 of the area of traditional water plants. It can be delivered within 1 month, smart production, unattended, low overall cost, suitable for industrial scenarios, and is expected to penetrate quickly after the first project is implemented. Water intake and sewage restrictions are compounded to reduce costs, and there is an urgent need for recycled water in emerging industries such as PCBs and photovoltaics, as well as high-water consumption and polluting domestic production industries. The company digs deep into the potential market for recycled water. In 2023, many landmark resource-oriented projects such as the Xidong Industrial Sewage Treatment Project, the Ningxia Zhongwei Industrial Park Water Recycling Comprehensive Utilization Project, the Tangshan Nanbao Sewage Treatment Plant Commissioned Operation Project, Jiangsu Changzhou Riverside Phase V, and the Sewage Resource Utilization Project were launched.

Profit forecast and investment rating: Sewage and wastewater recycling experts, Shinmizushima products accelerate the release of the industrial reclaimed water market. Considering factors such as the slowdown in G-side orders and the B-side order delivery cycle, we reduced the net profit to the mother in 2024-2025 from 1.54 billion yuan to 0.94 billion yuan. The estimated net profit to the mother in 2026 is 162 million yuan, corresponding to 17/13/10 times PE, maintaining the “buy” rating.

Risk warning: Policy progress falls short of expectations, project progress falls short of expectations, and industry competition intensifies.