Raise profit forecasts and target prices to maintain buying ratings

The Jining power generation revenue dispute was resolved to boost solid waste business profits in 2024-26. Raising the profit forecast, we expect the company's EPS for 2024-26 to be 2.13/2.23/2.43 yuan, respectively (previous value 1.99/2.18/2.38 yuan). Comparable company Wind agreed to expect the average PE value to be 14 times. Considering that the company's net profit CAGR in 2024-26 was lower than the comparable average, the company was given 12 times PE in 24, with a target price of 25.56 yuan (previous value of 23.88 yuan). Payables have been accelerated, and operating cash flow has remained at a good level; capital expenditure has declined, and the expansion of free cash flow is expected to support an increase in the scale of dividends; the company made it clear that DPS will increase by no less than 10% year-on-year in 2024-26, and the corresponding dividend rate will not be less than 2.5%/2.7%/3.0%. Maintain a “buy” rating.

The Jining power generation revenue dispute was resolved, and the 2024-26 solid waste business profit company's Jining Phase II project was put into trial operation in the second half of 2020. However, due to disputes over power generation business licenses and power purchase and sale agreements, the State Grid Shandong Jining Power Supply Company suspended payment of electricity costs generated by the project from November 2020 to May 2024. After a final court ruling, the power generation revenue dispute for the Jining Phase II project was resolved. The company received a cumulative electricity bill of 132.6 million yuan on June 21; the company expects to increase net profit by about 117 million yuan in 2024. Considering the increase in solid waste treatment operations, we raised the company's solid waste treatment business revenue by 2.1% and gross margin by 0.22 to 0.23 pct in 2024-26.

Up to now, there have been no similar disputes in the waste incineration power generation projects that the company has put into operation.

Free cash flow is expected to continue to improve. The 2024-26 dividend plan clearly indicates that the 2023/1Q24 company's operating cash flow will increase by 2.1 billion/530 million over the same period, mainly due to the accelerated recovery of accounts receivable; the company plans to resolve the repayment of more than 2 billion dollars in stock accounts receivable in 2024. We are optimistic that the company's operating cash flow will remain at a good level in 2024-26. The company's ongoing solid waste projects have been completed one after another, and the demand for construction capital has declined. The company plans to spend 1.38 billion yuan on additional projects in 2024. We expect the company's free cash flow to continue to expand in 2024-26, which will support the increase in the size of dividends. The company's latest shareholder return plan clearly shows that the 2024-26 DPS will increase by no less than 10% year-on-year. Based on 2023, the 2024-26 DPS is expected to be no less than 0.53/0.58/0.64 yuan/share, and the dividend ratio is expected to be no less than 2.5%/2.7%/3.0%.

Risk warning: The commissioning of waste incineration projects has fallen short of expectations; the financing trend has been drastically reversed; and the rise in natural gas prices has exceeded expectations.