Key points of investment

The two rounds of transformation anchor resource utilization, and the strategic layout is clear and steady. Reviewing the company's business development process for nearly ten years, the company went through two rounds of business adjustments to achieve a transformation from the initial environmental restoration business drive to resource utilization. The company's initial listing was based on environmental remediation business. Thanks to stricter environmental enforcement, the company's environmental remediation business revenue achieved rapid growth, reaching a compound growth rate of 59.1% in 2014-2019; in 2016, the company began to fully enter the solid hazardous waste field with waste incineration as an entry point. As waste incineration power generation projects were completed and operated one after another, the company successively acquired solid hazardous waste resourcing/harmless companies such as Yangxin Pengfu and Hangzhou New Materials, forming a hazardous waste treatment and disposal system centered on resource utilization; since 2021, the company has successively acquired a sinusoidal wave of mergers and acquisitions. Xinshengyuan, Zhejiang Jia Tianhe expanded its industrial chain to the fields of deep-processing products, new energy materials, and medical waste plastics and glass waste. Clear business transformation has enabled the company's performance to continue to grow over the years. In 2014-2023, the compound growth rates of the company's operating income and net profit to mother were 33.66% and 17.76%, respectively.

The incentive mechanism has been improved, and the increase in executive holdings shows the company's confidence in long-term development. Since its listing, the company has implemented three equity incentive plans in 2016, 2018, and 2020, respectively. Covering executives, middle and senior management, and core technical backbone, it has played a good role in boosting the enthusiasm of the company's employees. Except for 2023, due to the fact that the Xinke project was in the production capacity climbing phase, the 2016-2022 equity incentive assessment targets were all exceeded. Since 2023, company executives such as Wu Xiujiao and Chen Wangming have successively increased their holdings of the company's shares, with a cumulative increase of 0.6128 million shares in 2023-2024.6, reflecting the firm confidence of the company's executives in the future development of the company and their affirmation of the long-term investment value of the company's shares.

Expand horizontally and vertically to achieve full industrial chain coverage and create channels+qualifications+technical barriers. After years of development, the company has established and perfected a solid hazardous waste treatment system to achieve the entire industry chain layout from front-end hazardous waste disposal capacity to back-end deep processing. We believe that the core competitiveness of resource-based enterprises lies in the three aspects of channels, qualifications and technology:

(1) Channel aspect: Due to environmental risks that may be caused by long-term transportation of pollutants, hazardous waste transfer generally follows the principle of proximity. Therefore, for solid hazardous waste companies, the hazardous waste collection capacity of the project site is one of the core competencies. The company's Xinke project, which was put into operation in 2023, is located in Jiangxi Province, which has a non-ferrous metals industry cluster. The non-metallic resource projects are located in the main medical hazardous waste generation sites in the country such as Jiangsu and Zhejiang, and are expected to provide a good guarantee for the company's front-end receipt; (2) Qualification: As of 2023, the total hazardous waste management license approval and processing scale of the company's projects in operation and construction is 1.145 million tons/year. Resources and detoxification are 0.983/0.162 million tons/year, respectively (including Zhuhai Xinhong's intention to apply for a hazardous waste license of 0.198. million tons/year), which is beginning to take shape in a fragmented market pattern; (3) Technical aspects: Since resource efficiency fluctuates depending on the place of collection and season, the company is required to continuously upgrade and transform its own projects. Since 2020, Gaoneng Pengfu and Jingyuan Gaoneng have carried out many technical reforms to increase production capacity and reduce energy consumption.

Project orders are growing steadily, and waste incineration is being intensively cultivated. The environmental engineering and operation business, as the company's basic business, has maintained a steady trend in recent years. In 2023, new environmental engineering orders amounted to 3.123 billion yuan, an increase of 6.4% over the previous year. The operating business is mainly waste incineration power generation. Currently, most projects have entered the operation period. With the increase in capacity utilization and the extension of the industrial chain, it is expected that the company's cash flow situation will improve.

Investment suggestions: We selected Zhejiang Fu Holdings (a wholly-owned subsidiary, Shenlian Environmental Protection lays out the entire hazardous waste recycling industry chain); Huicheng Environmental Protection (an expert in recycling waste catalysts) and Weiming Environmental Protection (a leading domestic household waste incineration treatment company) as comparable companies. The average PE of comparable companies in 2024/2025 was 18X and 13X. The company's current resource-based production capacity continues to expand, and technical reforms in several projects have been completed one after another. Combined with the current rise in metal prices, the profitability of the company's resource-oriented business is expected to further improve. The company is expected to achieve revenue of 15.21/17.46/19.32 billion yuan in 2024-2026, up 44%/15%/11% year on year; net profit to mother of 0.92/1.11/1.27 billion yuan, up 81%/21%/15% year on year. First coverage, giving a “buy” investment rating.

Risk warning: risk of price fluctuations of raw materials and products, increased risk of industry competition, risk of upstream receipt falling short of expectations, risk of new project operation falling short of expectations.