Core views

The controlling shareholder of the company is Guangzhou Environmental Investment Group, and the actual controller is the Guangzhou Municipal Government, which is the sole investor and operator of the Guangzhou Waste Incineration Project. Thanks to the increase in the scale of the company's production capacity and the increase in utilization rate, the company's operating performance continues to improve. In 2023, the company paid a cash dividend of 0.52 yuan (before tax) per share, with a total dividend of 0.468 billion yuan, corresponding to a dividend payment rate of 63.69%. The company's dividend commitment and steady growth in operating project earnings help guarantee steady returns for investors. The company is located in Guangzhou. The strong local economic strength guarantees the repayment of the company's garbage disposal expenses. At the same time, Guangzhou is the first megacity in China to achieve “zero landfill” of primary household waste, and the garbage supply is guaranteed. In addition, Guangzhou is actively developing stocks of old waste mixed with solid waste to further guarantee the growth of the company's waste incineration capacity utilization rate. In addition to waste incineration projects, the company is actively expanding heating, biomass and other businesses, and is expected to build a diversified revenue structure.

summary

Guangzhou's leading garbage disposal company, business performance is expected to grow steadily

The company is Guangzhou Environmental Investment Group Holding Company. The actual controller is the Guangzhou Municipal Government, which is the sole investor and operator of the Guangzhou Waste Incineration Project. In terms of dividend payments, the company paid a cash dividend of 0.52 yuan (before tax) per share in 2023, for a total dividend of 0.468 billion yuan, corresponding to a dividend payment rate of 63.69%. Considering the company's dividend promise and steady growth in operating project revenue, we expect the company's dividend scale to increase steadily to ensure steady income for investors. The company's operating income and net profit overall showed a steady growth trend. From 2019 to 2023, the compound growth rate of the company's revenue reached 24.88%, and the compound growth rate of net profit to mother reached 55.41%. The company's business performance is growing mainly due to the increase in the capacity of waste incineration power generation projects put into operation and the impact of the one-time confirmation of national supplement revenue. Along with the steady increase in the company's capacity utilization rate, the company's operating performance is expected to achieve steady growth.

The garbage disposal market is becoming saturated, and the operating capacity of the project becomes an increase in the population and urbanization ratio of key towns driving the increase in garbage production and driving the continuous rise in demand for garbage disposal. At present, the degree of urbanization in China has risen to a high level. The pace of urbanization is gradually slowing down, and the growth in demand for garbage disposal is also expected to enter a stage of slow growth. As domestic waste incineration treatment capacity growth is slowing down, we believe that the development focus of relevant enterprises will shift from project construction to project operation. Recently, some listed domestic waste incineration companies have released 2023 reports, and their production capacity utilization rate (production capacity/in-hand production capacity) is over 80%. Under this trend, the scale of corporate capital expenditure is expected to gradually decline, and the cash flow and operating efficiency of high-quality incineration enterprises are expected to continue to improve, providing a material foundation for the continued implementation of cash dividends.

The company, which has significant location advantages and guarantees financial payments and utilization rate growth, is the sole investor and operator of Guangzhou's waste incineration power generation projects. The waste treatment projects are mainly distributed in Guangzhou. Guangzhou's social economy and fiscal revenue are showing a steady growth trend. The financial payment capacity is strong, and the repayment of garbage disposal projects is guaranteed. In terms of incremental garbage, while the economic, social and population size of Guangzhou is growing steadily, the amount of garbage removed and the scale of garbage removal per capita are also on the rise. In this context, the future increase in household waste in Guangzhou can effectively promote an increase in the capacity utilization rate of waste incineration projects. In terms of waste stocks, Guangzhou currently has a total stock of about 80 million tons of stale garbage, and is rich in stale waste resources. In addition to domestic waste treatment, waste incineration projects can also mix a certain proportion of industrial solid waste and municipal sludge, which helps to further improve the capacity utilization rate of waste incineration projects. While the company is based in the Guangzhou market, it is also actively expanding into external markets. At present, the company has put into operation a waste incineration power generation project in Leizhou, Guangdong Province, and a waste incineration power generation project in Shaodong, Hunan. We believe that the company has rich waste incineration project operation experience and equipment research and development capabilities, and has the ability to develop incineration markets outside of Guangzhou.

The waste incineration business grew steadily, and actively built a diversified revenue structure. By the end of 2023, the company was operating 14 waste incineration power generation projects, mainly distributed in Guangzhou, Leizhou and Shaodong; it was operating waste incineration power generation projects with a production capacity of 32090 tons/day, with an installed power generation capacity of 940 MW. In terms of garbage disposal, along with the increase in the company's commissioning projects and the increase in production capacity utilization, the company's garbage disposal volume continues to grow. The unit price of the company's garbage disposal is regularly approved by the government based on the operation of the project. We expect the unit price of garbage disposal for the company's incineration project to maintain smooth operation. The company's online power generation revenue is settled according to feed-in electricity and feed-in tariffs. Thanks to the advantages of high-parameter incinerators and waste calorific value, the company maintains a high level of electricity generation per ton of waste. In terms of feed-in tariffs, according to the relevant regulations of the National Development and Reform Commission, feed-in tariffs for waste incineration projects include subsidized electricity prices and basic electricity prices. Thanks to the high standard price of coal-fired power generation in Guangdong Province, the company's feed-in tariff structure accounts for a relatively low share of China's supplementary revenue, and the impact of the decline in state subsidies is less. Furthermore, the company is actively expanding businesses such as heating and biomass treatment, and is expected to build a diversified revenue structure and increase business profits. As a leading garbage disposal enterprise in Guangzhou, the company is deeply involved in the field of solid waste treatment. The capacity utilization rate of waste incineration and biomass treatment continues to rise, and business performance is expected to continue to grow. We expect the company's revenue from 2024 to 2026 to be 3.94 billion yuan, 4.25 billion yuan, and 4.48 billion yuan, respectively, and net profit to mother will be 8.94 billion yuan, 10.50 billion yuan, and 1,146 billion yuan, respectively. The corresponding EPS is 1.19, 1.40, and 1.53 yuan/share, which is covered for the first time, giving the company a “buy” rating.

Risk warning

Risk of capacity utilization falling short of expectations; risk of falling garbage disposal prices; risk of changes in preferential tax policies.