Core views:
The transformation of the “conch cement” shadow stock — the bottom “duality” of solid waste and cement. As a shareholding platform for Conch employees, the company's trade unions and individual employees hold major shares. Currently, its main assets/projects include 18% indirect shares in “Conch Cement” and 59,000 tons/day solid waste project. Due to the decline in profit/dividends of “Conch Cement” and continued high investment in solid waste, the net profit from continuing operations in 21-23 was 69.1/38.5/2.46 billion yuan, free cash flow (FCF) of -56.0/-40.2/-337 billion yuan, and dividends of 10.8/6.7/330 million yuan. However, Conch Cement's profit bottomed out, solid waste investment ended, and contributed to stable cash flow. Under a double bottom reversal, it is expected that FCF+ will receive a total dividend of 5.1/25.1/3 billion yuan from associated companies in 24-26, compared to the current market value of only HK$11.3 billion.
Solid waste: Misplaced competition for small-scale projects, shifting from “hematopoiesis” to “hematopoiesis”. Relying on cooperation with Kawasaki Heavy Industries, the world's leading small-scale grate equipment, the company misplaced the 300-600 tons/day waste incineration project. By the end of 2023, 45,400 tons/day was in operation, 0.64 million tons/day (planned to be completed in 24 years), and 70,000 tons/day (no start-up schedule). Under the launch of the project, the company will shift from relying on “Conch Cement”'s unstable joint dividend (14.2/15.8/750 million yuan in 21-23) to provide more than 2 billion dollars/year in cash flow, and dividend capacity/stability will be greatly improved.
The profits of “Conch Cement” have bottomed out, and the equity valuation is yet to be re-evaluated. The company holds 18% of “Conch Cement” shares with a theoretical market value of HK$23.6 billion, while the current market value of the company is only HK$11.3 billion. Referring to the in-depth report of the Guangfa Building Materials team on June 1, it is expected that “Conch Cement” profits and dividends are expected to bottom out and stabilize. Combined, the main business no longer “sucks blood”, cement dividends pay out shareholders' returns, and this equity asset is expected to undergo a revaluation. Referring to the profit forecast of Guangfa Building Materials and the dividend ratio for 23 years, it is estimated to contribute 1,52/16.6/1.80 billion yuan in joint profit and 6.8/75/8.1 billion yuan in joint venture dividends from 24-26.
Profit forecast and investment advice: The company's net profit for 24-26 is estimated at 24.4/26.7/2.87 billion yuan, corresponding to PE valuation 4.3/3.9/3.6 times. With a significant improvement in cash flow, the Segment PE valuation had a reasonable value of 9.76 yuan/share (HK$10.60 per share), which for the first time covered a “buy” rating.
Risk warning. Solid waste profits and repayments fall short of expectations; joint venture profits and dividends fall short of expectations, etc.