After experiencing two consecutive years of sluggish performance from 2022 to 2023, we believe 2024 is expected to usher in an inflection point in the income statement and cash flow statement. At this point, we are systematically sorting out the core competitiveness of the high-energy environment and marginal changes this year.

Dimension 1: Where is the core competitiveness of high-energy environments reflected?

1) Management mechanism: 1) Decisive and clear strategic transformation: The company's early business focused on environmental restoration projects. Over the past ten years of operation, it has achieved a shift from mainly To-G to To-B, from engineering to operation, and from the field of environmental restoration with a market size of 10 billion yuan to the field of hazardous waste recycling with a market size of over 100 billion yuan. 2) Comprehensive incentive assessment mechanism:

Since its listing, the company has implemented three equity incentive plans in 2016, 2018, and 2020; implemented the “My Remuneration, I Decide” management system in daily management, which links remuneration and performance contributions to the greatest extent possible; the company has also set up a partner platform to transform employees from an employment system to a partnership system to stimulate employees' creativity.

2) The entire industry chain: As of the end of 2024Q1, the total number of hazardous waste treatment licenses approved by the company was about 785,000 tons/year; the project under construction, Zhuhai Xinhong plans to apply for a hazardous waste license of 198,000 tons/year; currently, it has also formed 3 comprehensive closed-loop recycling chains for copper-containing materials, lead-containing materials, and nickel-containing materials. It is one of the few domestic resource utilization enterprises with integrated front-end and back-end treatment capabilities.

3) Technology orientation: R&D expenditure reached 320 million yuan in 2023, accounting for about 3.1% of revenue; 648 R&D personnel, accounting for 11.3% of the total number of employees; companies are also continuing to make technical improvements for hazardous waste recycling projects to reduce costs and increase efficiency.

Dimension 2: What marginal changes will the high-energy environment face this year?

The company's performance has continued to decline since 2022, which is unsatisfactory. The company achieved net profit of 505 million yuan in 2023, down 27.13% year on year; net profit from 2024Q1 was 194 million yuan, down 5.95% year on year; the continued decline in performance was mainly due to the profit of Jiangxi Xinke project falling short of expectations, and losses from Chongqing Yaohui and Jinchang high energy projects.

1) We expect the above 3 projects to gradually rationalize production processes and turn losses into profits in 2024. 1) Jiangxi Xinke: The production capacity utilization rate is estimated to be around 30% in 2023. After completing the technical reform of the flue gas treatment system in April of this year, it was fully put into operation. The capacity utilization rate continues to increase, and profit flexibility can be expected. 2) Chongqing Yaohui: Net profit loss was about 85.85 million yuan in 2023 due to process technology reform, material structure, receiving area, etc.; currently, the management team, material procurement, and technical process have all been optimized. It is expected that profits can be gradually released starting 2024Q1, and it is expected that the loss will be turned into a profit this year. 3) Jinchang High Energy: In 2023, the loss was about 91.36 million yuan due to falling palladium metal prices, etc. The second phase of the project was started and put into trial operation in mid-April 2024. After several months of adjustments and run-ins, it is expected that it will be officially put into operation. It is expected that the profit for the whole year will turn a loss into a profit.

2) The rise in the price of metals such as copper, gold and silver was the icing on the cake for the company's Q2-Q3 performance. By the end of 2023, the company's inventory book value was about 4.93 billion yuan, mainly raw materials and products. Considering that current copper prices, gold prices, and silver prices have clearly risen compared to last year's Q4, the existence of a difference in purchasing and sales time also means that the company's single-ton processing profit is currently expected to increase significantly (see text for details of the calculation); of course, the company usually uses monthly weighted average accounting for cost settlement; the company will also use some hedging measures to hedge against fluctuations in metal prices.

Profit forecasting and valuation

We expect high energy environment's 2024-2026 revenue to be 17.855 billion yuan, 21.67 billion yuan, and 25.560 billion yuan, up 68.8%, 21.4%, 18.0% year on year, net profit to mother of 997 million yuan, 1,177 billion yuan, 1,423 billion yuan, up 97.6%, 18.1%, and 20.9% year over year, corresponding to PE valuations of 10.4x, 8.8x, 7.3x, and PB valuations of 1.04x, 0.97x, 0.90x. Maintain a “buy” rating.

Risk warning

1. The operational stability of hazardous waste recycling projects falls short of the expected risk; 2. The production capacity utilization rate falls short of the expected risk due to the low amount of hazardous waste collected.