Key points of investment
The integrated layout of solid waste operation and equipment is based on Chongqing radiating the whole country and opening a new chapter of going overseas. After more than 20 years of development, the company has grown into a full-industry chain service provider integrating project investment, EPC general contracting, core equipment R&D and manufacturing, and operation management services. It is based in Chongqing and spans 16 provinces/municipalities across the country. The actual controller of the company is the Chongqing Municipal State-owned Assets Administration Commission. As of 2024Q1, SUEZ indirectly held 11% of the shares. In 2024, the company cooperated with SUEZ to open a new chapter for equipment and EPC going overseas.
Equipment technology alpha has led to a rapid improvement in cash flow, and 34% of the 2023 dividend ratio has room for improvement. In 2015-2023, the company's revenue recovered 15%, net profit to mother increased 22%, and the 2023 net present ratio rose to 1.95, 17% higher than the average value of the solid waste sector. The company's free cash flow was the first to correct in 2022. 2024Q1 reached 0.508 billion yuan, close to the full year of 2023. It was mainly driven by equipment technology alpha: 1) good cash flow from equipment sales to B; 2) technical capabilities brought operational advantages. The company ranked first among national solid waste companies. In 2023, grid B-side payments accounted for 53% of the company's waste incineration operating revenue, higher than the industry average of 48%. In 2024, the company plans to invest in the construction of Chongqing Bishan and Gansu Baiyin (Phase II) projects, with a total investment of about 1 billion yuan and installment construction, and capital expenditure will drop further. The company's endogenous dividend capacity has improved, with a dividend ratio of 34% in 2023.
Waste incineration tons rank first among national companies on the Internet, and the State Supplement conservatively confirmed that earnings were undervalued. 1) Scale: By the end of 2023, the company's waste incineration scale was 0.0613 million tons/day; ① Wholly-owned and controlled projects: 0.04 million tons/day, under construction/11%; ② Equity participation projects: 0.0151 million tons/day already in operation, 13% under construction/already built. 2) Leading efficiency: Equipment advantages bring operational superiority. In 2023, the company's wholly-owned and controlled projects generated 392 degrees per ton and 344 degrees per ton, ranking first among solid waste companies with a national layout. In 2023, the company's average plant electricity consumption rate was 12.18%, 2.81 pct lower than the industry average. The heating capacity of the company's wholly-owned and controlled projects was +28% to 0.79 million tons in 2023, increasing revenue and improving cash flow from power generation to heating. 3) Resilience of national supplements:
As of the end of 2023, 13 of the company's wholly-owned and controlled projects (with a scale of 8800 tons/day) had not been included in the national supplement list, and no corresponding national supplement revenue was confirmed. We estimate that 11 of these projects had annualized supplementary income of about 0.1 billion yuan, which brought about a 6.43% increase in net profit compared to 2023.
A leading technology leader in waste incineration equipment, joined hands with SUEZ to accelerate overseas trips. The company pioneered the introduction of German Martin technology in 2000 and achieved localized replacement. As of 2023, the company's incinerators accounted for more than 30% of the domestic market, and were recognized by peers such as Yuefeng, Wangneng, and Shengyuan. Equipment revenue also increased 116% to 0.957 billion yuan in 2023. The company actively deployed overseas, adding more than 0.6 billion yuan in overseas contracts in 2023. By the end of 2023, the company's technology and equipment had been applied to the United States, Germany, India, Ethiopia, Thailand, Vietnam and other places. We estimate that the potential market for complete waste incinerator equipment in the 10 ASEAN countries and India alone is 51.6 billion yuan in 2023, and there is plenty of other overseas market space. In 2024, Sanfeng joined hands with SUEZ as its sole partner in the solid waste sector in mainland China, and overseas travel is expected to accelerate.
Profit forecasting and investment rating: The company's solid waste “operation+equipment” integrated layout, leading operating experience and technical level. 1) Profit: High solid waste operation efficiency & heating increase profits. China National Insurance conservatively confirmed that profits were undervalued, and cooperative SUEZ equipment went overseas faster. 2) Cash flow: Technology alpha has led to a rapid improvement in cash flow. As the scale of construction declines and equipment revenue increases, cash flow continues to increase, and dividend potential is high. We expect net profit to be 1.321/1.495/1.681 billion yuan in 24-26, +13%/12% YoY, corresponding to 12/10/9 times PE. First coverage, giving a “buy” rating.
Risk warning: rising capital expenditure, risk of accounts receivable, the pace of entry of projects into the inventory falls short of expectations, etc.