The target price was raised to HK$5.10 to maintain the “Buy” rating

Due to the decline in the scale of construction projects and the continuous increase in operating capacity, we expect Everbright Environment to enter a positive free cash flow cycle. According to the construction progress of the project, we lowered the construction revenue forecast. We expect net profit of 41.48/42.82/4,391 billion HK$4.391 billion for 24-26, giving the company 7.5 times the 2024 forecast PE (comparable to the company Wind's agreed average expectation: 7.5 times), and the target price is HK$5.10 (previous value: 4.43 HKD, based on 5.9 times 2024E PE) to maintain the “buy” rating.

Vietnam's Hue Waste-to-energy Project Completed

On April 6, Everbright Environmental completed the Hue waste-to-energy project invested and operated in Chengtian Hue Province in Vietnam. The Hue project is the second comprehensive environmental treatment facility invested and built by Everbright Environmental in Vietnam. The project is located in Perfume City, Chengtian Hue Province. It covers an area of about 11 hectares, with a total investment of about 74.55 million US dollars. Currently, it can handle about 220,000 tons of household waste every year, and the annual connected green electricity capacity is about 80 million kilowatts.

Sign a sewage project to expand financing channels

On June 6, Everbright Water obtained the first phase of the sewage treatment project in Anyang, Henan. The project is a BOT model, with a 30-year franchise period, and the total investment is estimated to be about 663 million yuan, including a sewage plant with a daily treatment scale of 100,000 tons and a 10.3 km sewage network. The effluent water quality complies with surface water category IV standards.

On May 20, Everbright Environment completed the issuance of the second issue of 2024 medium-term notes, with an issuance amount of RMB 2 billion, of which type 1 has a term of 3 years, a coupon interest rate of 2.38%, type 2, and a coupon interest rate of 2.55%.

Free cash flow is expected to continue to improve

In 2023, Everbright Environmental distributed a final dividend of HK8.0 cents per share and a full year dividend of HK22.0 cents, with a dividend ratio of 30.5%, corresponding to the dividend rate of 5.5% on July 2. According to the company's project operation and construction progress, we expect that the increase in garbage disposal volume in 2024 is expected to increase operating cash flow, and the decline in the scale of projects under construction will lead to a contraction in capital expenditure, thereby further improving free cash flow and providing good support for the company's financial health and shareholder returns.

Risk warning: Construction service revenue declined more than expected, competition for biomass and hazardous waste disposal intensified, and free cash flow improved less than expected.