Revenue grew steadily, production capacity load was low, and some major price declines affected profits. The company released the 2023 report and the 2024 quarterly report. The revenue for 2023 was 10.58 billion yuan (+20.6% year over year) and net profit of 505 million yuan (-27.1% year over year). The profit decline was due to Xinke's production capacity climbing in various process stages and technical reforms to environmental protection equipment, and Yaohui and Jinchang also had a lower load. In addition, inventory price losses of 30.71 million yuan were calculated due to falling prices of metals such as palladium. In 2023, gross margin/net profit margin was -5.3/-3.1 pct to 18.2%/4.8% year over year, and the rate for the period fell 0.73 pct to 13.3% year over year.

2024Q1 had revenue of $3.125 billion (+80.1% YoY) and net profit to mother of $194 million (-5.9% YoY). The net operating cash flow was revised to 100 million yuan along with the commissioning of various projects.

Revenue from recycling hazardous waste has increased rapidly, production capacity is expanding, and we are waiting for hazardous waste resources to blossom. Revenue from recycling hazardous waste in 2023 was 6.468 billion yuan (+59.5% YoY), accounting for 61.1%. However, due to production capacity still climbing and falling prices of some metals, gross margin fell 5.7 pct to 8.3% year on year, and Jingyuan/Xinke achieved net profit of 131 million yuan/3.84 million yuan. According to the company's official account, the Xinke project was fully put into operation on April 16, with production capacity such as 100,000 tons/year for cathode copper and 3 tons/year for gold ingots. The Jinchang High Energy Phase II project was launched and put into operation on April 18. The 198,000 tons/year Zhuhai project is expected to be put into operation within the year. The company's hazardous waste industry chain continues to improve, and we expect increased capacity utilization and improved profitability.

We have excellent governance genes, continue to launch equity incentive plans, and look forward to management effectiveness. According to the company's 2023 equity incentive plan, it is proposed to grant 752 clients a total of 269.31 million shares, accounting for 1.75% of the total share capital. The target for unlocking the incentive is for 2024-2026 to be no less than the corresponding net profit of 10.4/12.5/1,385 billion yuan. The company continues to introduce equity incentives at intervals of 2-3 years/time. We expect the company to further verify the replicability of the project and improve profitability through management governance.

Profit forecast and investment advice: The company's net profit for 2024-2026 is estimated to be RMB 988/11.59/1,354 million yuan, respectively, and PE is 10.97/9.35/8.00 times, respectively. Hazardous waste leaders have begun rapid growth, the industrial chain is fully extended, and the management and governance system is of high quality. Refer to peer companies to give 15 times PE in 2024, corresponding to a reasonable value of 9.64 yuan/share, maintaining a “buy” rating.

Risk warning. The recycling of hazardous waste is progressing slowly; orders for environmental remediation have declined; fluctuations in metal prices, etc.