Description of the event

In 2024Q1, Hanlan Environmental achieved operating income of 2,716 billion yuan, a year-on-year decrease of 3.08%, net profit to mother of 381 million yuan, an increase of 22.84% year-on-year, and net profit after deducting non-return to mother of 370 million yuan, an increase of 23.19% over the previous year.

Incident comments

Capital expenditure has declined, solid waste project revenue has declined, and gas price adjustments have led to an obvious recovery in profits. 1) The solid waste treatment business achieved revenue of 1,432 billion yuan in 2024Q1, a year-on-year decrease of 5.91%. Excluding this impact, revenue actually increased by 130 million yuan. Excluding this impact, revenue actually increased by 130 million yuan, mainly due to the fact that the Guiyang and Guiping projects were officially put into operation in 2023 and the business expansion of existing projects increased. The solid waste treatment business achieved net profit of 249 million yuan, a year-on-year decrease of 7.65%, mainly due to new entry projects in the sanitation business in the current period, but revenue could not be confirmed simultaneously; 2) The energy business achieved revenue of 854 million yuan, an increase of 0.50% over the previous year, and realized net profit of 41 million yuan, an increase of 52 million yuan over the previous year, mainly due to an improvement in the sales price spread of the natural gas business; 3) The water supply business achieved revenue of 221 million yuan, an increase of 4.82% year on year, mainly due to the same water sales volume The ratio has increased, and the company is actively improving core indicators such as water damage treatment and per capita efficiency; 4) The drainage business achieved revenue of 159 million yuan in 2024Q1, an increase of 0.12% over the previous year.

The company actively expands asset-light operation services such as the operation of rural sewage treatment plants, and continues to expand its business in the field of comprehensive water environment treatment.

Expense rates increased during the period, and cash flow improved markedly. The company's expense ratio for the 2024Q1 period was 11.47%, up 0.53 pct year on year, mainly due to the increase in management expenses ratio of 0.53 pcts to 5.63%. Cash flow has improved markedly. The 2024Q1 revenue ratio was 89.0%, up 16.0pct from the previous year; the net cash flow from operating activities was 342 million yuan, or -192 million yuan in the same period last year. The main reason was that the company and local governments continued to promote the implementation of fee disbursement mechanisms, and the solid waste business and drainage business increased in the current period.

The payout ratio increased 118.2% year over year, and the dividend ratio increased to 2.6%. In 2023, the company announced a cash dividend of 4.8 yuan for every 10 shares, an increase of 118.18% over the previous year. Based on the company's current total share capital of 815 million shares, the absolute amount of dividends distributed in 2023 is about 391 million yuan, accounting for 27.38% of the company's net profit to the mother in 2023, and the company promised that the annual cash dividend distributed per share from 2024-2026 will increase by no less than 10% year-on-year. Based on the current stock price of 18.46 yuan/share, a dividend of 0.48 yuan/share corresponds to a dividend rate of 2.6%, which is a significant increase compared to 2022. I am optimistic that the company's dividend rate will continue to increase.

Ongoing waste incineration projects are gradually being put into operation, and overseas markets are being deployed. As of the end of 2024Q1, the company's current orders for domestic waste incineration power generation totaled 35,750 tons/day (excluding shareholding projects), of which 29,800 tons/day (1,750 tons/day of additional production was added in 2023), and the total production capacity of the projects under construction+preparation and unbuilt projects was 5,950 tons/day. As the project is gradually put into operation, there will still be a certain operating profit contribution in the future. Furthermore, considering the gradual saturation of the domestic market, the company has begun to actively deploy overseas markets such as Southeast Asia. The second phase of agricultural reclamation project in Bangkok, Thailand (1,400 tons/day) and the Anu project (1,400 tons/day) began construction in February 2024, and the commissioning of the project will increase the company's investment income. The company's net profit for 2024-2026 is estimated to be 15.8/17.4/1.92 billion yuan, respectively, and the corresponding PE is 9.8x/8.9x/8.0x, respectively, maintaining a “buy” rating.

Risk warning

1. Risk that the project progress falls short of expectations;

2. The risk of a decline in national compensation.