Core views:
The company's plan to acquire Renhe Environmental has been approved by the Shenzhen Stock Exchange, and it is expected that the acquisition will be completed to increase profits.
The company plans to issue shares and purchase 63% of its shares in Renhe Environment from 19 counterparties including Hunan Renlian. The transaction price was 2.197 billion yuan, of which 120 million shares were issued to raise 1.87 billion yuan, and raised no more than 768 million yuan in supporting capital (of which 327 million yuan was used to pay cash consideration and 4.4 million yuan to supplement working capital), which was reviewed and approved by the Shenzhen Stock Exchange according to the June 7 announcement plan. Renhe Environmental promised that the net profit for 2024-2027 will not be less than 4.16/4.36/408.475 billion yuan, corresponding to 2024 PE of 8.38x, and the acquisition valuation is reasonable.
According to estimates in the company's transaction report, EPS will be diluted from 1.2533 yuan/share to 1.2496 yuan/share in the pre-acquisition test in 2023, but there is still room to increase EPS production in the future as production capacity is put into operation.
The acquisition of Renhe Environmental obtained garbage transfer and food waste production capacity in Changsha, and the entire solid waste industry chain has significant collaborative advantages. Renhe Environmental has 10,000 tons/day waste transfer capacity and 1,600 tons/day preparation waste transfer capacity and 1,200 tons/day preparation capacity for food waste treatment in Changsha. Revenue comes from garbage disposal fees, biogas power generation internet, industrial grade mixed oil, etc., and is an upstream part of Junxin Co., Ltd.'s main waste incineration business. Combining the improvement of the renewable resource recycling network proposed in the recent “Trade-in Policy” to coordinate the construction of household waste sorting and collection, transit storage, and renewable resource recycling facilities within the region, the company is expected to achieve an integrated solid waste layout and form strong collaboration.
The company's free cash flow has been drastically improved, and the dividend attributes are outstanding. In 2023, the company's operating cash flow increased 9.9% year-on-year to 869 million yuan. Investment cash outflow was only 160 million yuan, and free cash flow was drastically corrected to 709 million yuan. The company's cash dividend amount remained at 369 million yuan in 2023, and the dividend ratio reached 71.81%. Corresponding to the current market capitalization dividend rate of 5.6%, the dividend value is outstanding.
Profit forecasting and investment advice. Without considering the acquisition of Renhe Environmental, it is expected to achieve net profit of 5.52/6.19/662 million yuan in 2024-26, corresponding to the latest PE 12.0/10.7/10.0 times. The company lays out the entire solid waste industry chain, and the dividend value is outstanding. Refer to comparable companies that gave 15 times PE in 2024, corresponding to a reasonable value of 20.18 yuan/share, maintaining a “buy” rating.
Risk warning. Electricity price subsidy risk; processing fee reduction risk; high customer concentration risk.