High quality operation+high dividends. For the first time, Yongxing Co., Ltd. was the leading waste incineration company in Guangzhou. As the production capacity of existing projects climbs, free cash flow is expected to continue to improve, providing a solid foundation for shareholder returns. We expect the company's 2024-2026 net profit of 0.9/1.02/1.15 billion yuan. According to Wind's consistent expectations, the average PE value of comparable companies in 2025 is 11.4x. Assuming that Yongxing Co., Ltd. and Comparable Company both maintain the 2023 dividend ratio on 2024/25, Yongxing Shares's dividend rate is 4.1%/4.6% higher than the comparable company average (2.7%/3.0%) (calculated based on the 7/17 closing price), and considering that the company's 2024-26 profit CAGR is 16% ahead of its peers, the company is given 17.1x PE in 2025, corresponding to a target price of 19.5 yuan, for the first time coverage is given a “buy” rating.

It covered Guangzhou's waste incineration industry, with the highest tonnage revenue (comparable companies ranked #2）公司背靠广州环投，控股垃圾焚烧项目14, with a total production capacity of 32,090 tons/day by the end of 2023; 12 of these projects were located in Guangzhou, covering all local waste incineration businesses. In 2021-2023, the company's new projects were put into operation one after another, driving steady growth in performance. After reverting to the impact of one-time payment and trial operation of the national supplement, the compounded revenue/net profit growth rate of the company reached 27%/38% in 2021-23. Thanks to 1) Guangzhou's higher benchmark electricity prices, disposal fees, and 2) even though 40% of the projects have not yet confirmed state subsidies (in accordance with prudent accounting standards), thanks to higher waste calorific value and tons of waste power generation in economically developed regions, the company's revenue per ton in 2023 is still at the top of the industry (365 yuan/ton, which is comparable to the company ranking #2，仅次于军信股份）；待国补确认后，公司单吨收入有望进一步提升。

As the production capacity of stock projects climbs, companies with high potential to increase profitability due to lower capacity utilization rates in 2023 (only 71% in 2023), depreciation and amortization of tons was the highest among our sample listed companies. As a result, although the company's revenue per ton was higher among comparable companies, the net profit per ton was not particularly prominent. As the company's advanced second-phase production capacity continues to rise and rigid costs are diluted, we expect the company's profitability to continue to increase. As free cash flow has been corrected in 2023 and we expect it to continue to improve in the future (operating cash flow rises steadily as production capacity climbs and capital expenditure peaks and falls), the company's balance ratio and financial expenses are also expected to continue to decline. We expect the company's net profit per ton of garbage to increase from 82 yuan/ton in 2023 to 99 yuan/ton in 2026, reaching the leading level in the industry.

Capital expenditure has declined and free cash flow is expected to support continued high dividends in 2020-2023. The company's net operating cash flow CAGR reached 51%; the company's capital expenditure peaked in 2021, and the CAGR for 2022 to 2023 was -48%. In 2023, the company's free cash flow was corrected for the first time, reaching 0.47 billion yuan, with a dividend payout ratio of 63.7%. We expect the company's capital expenditure to decline further in 2024-26. Free cash flow will increase from 0.5 billion in 2023 to 1.9 billion in 2026, and the balance ratio will fall back to around 53%. According to the prospectus, the company promises that the 2023-2025 dividend ratio will not be less than 60%. We predict that the company's free cash flow will be sufficient to support 0.6-0.7 billion dividends and loan interest of around 0.2-0.3 billion in 2025.

Risk warning: Changes in electricity price subsidy policies, depreciation of accounts receivable, and the mixing of old garbage falls short of expectations.