Introduction to this report:

The 2024 capital expenditure plan has been clearly reduced. Without taking into account the accelerated recovery of state subsidies, 2024 will see the company's free cash flow turn positive. Improved cash flow will support more steady cash dividends, which may be raised to higher levels.

Summary:

Maintain an “Overweight” rating. We maintain the company's projected net profit for 2024-2026 at HK$44.67, 45.41 and HK$4.620 billion, respectively, and the corresponding EPS of HK$0.73, 0.74, and 0.75, respectively. We reaffirm that the company's free cash flow inflection point will occur in 2024, dividends may be expected to rise to a higher level, and industry leaders are expected to face revaluation. The company was given a target price of HK$5.11, maintaining the “Overweight” rating.

Everbright Environment: The absolute leader with the highest production capacity in China's waste incineration industry. 1) The company is the flagship enterprise of Everbright Group and the only state-owned enterprise among listed companies in the waste incineration industry. 2) By the end of 2023, the company had a waste incineration production capacity of 158,900 tons/day, making it the world's largest waste incineration operator. The company's waste incineration production capacity has been put into operation in 2022, accounting for 13% of the industry's market share, and is in an absolute leading position.

The inflection point of free cash flow is approaching. 1) Stock price recovery: Stock prices were dragged down by the 10 billion share offering in 2018 and continued concerns about the decline in national supplements thereafter. High debt operations, receivables, and cash flow are long-term concerns for investors. 2) In terms of capital expenditure: The company's annual capital expenditure for 2020-2021 is approximately HK$28 billion, the capital expenditure for 2023 is HK$7.8 billion, and the company plans to have an overall capital expenditure of HK$6 billion in 2024. Along with the commissioning of reserve projects, capital expenditure has been drastically reduced. 3) In terms of free cash flow: The company's actual free cash flow in 2023 was almost positive. 4) We estimate that under the normal operating conditions of the company, the net cash flow from operating activities is conservatively expected to exceed HK$7 billion. The 2024 capital expenditure plan is clearly reduced. Without considering the accelerated recovery of state subsidies, 2024 will also see a positive change in the company's free cash flow. Improved cash flow will support more steady cash dividends. Major factors that have long suppressed company valuations have been eliminated.

There is plenty of room for revaluation of the company. The company currently has 2024E 4.5 times PE and 2023 PB 0.42. Compared to peers: 1) In terms of operating level, the company's operating efficiency is industry-leading. 2) In terms of financial data, the company is at a normal level in the industry. 3) From a PE perspective, the average value of 2024E PE of a comparable solid waste water company is 11.0 and 11.9 times; H-share Beijing Holdings and Yuefeng 2024E PE are 9.9 and 8.2 times, respectively. 4) From the perspective of PBROE, the company's 2023 ROE and PB were 9.27% and 0.42 respectively, and the average ROE and PB values of comparable solid wastewater companies were 10.15% and 1.22, respectively. Judging from the degree of matching between valuation and profit, the company was significantly underestimated. 5) The company currently has a static dividend rate of 6.75%, and the current dividend rate of 31% has a lot of room for improvement; in the context of declining capital expenditure and improved cash flow, there are also conditions for dividends to increase.

Risk warning: National supplement recovery falls short of expectations, dividends fall short of expectations, project operation falls short of expectations, etc.