Incident: The company achieved operating income of HK$32.09 billion in 2023, a year-on-year decrease of 14%, and realized net profit to mother of HK$4.429 billion, a decrease of 4% year-on-year, better than our expectations of HK$4.09 billion.

The share of operating revenue continues to rise, and the decline in construction revenue affects performance. Affected by the accounting and measurement rules of the BOT business, in the past period of rapid growth in the scale of garbage disposal, the company had a relatively high share of construction revenue. Since 2022, the company's capital expenditure has decreased, construction revenue has declined, and operating income from stock projects has become the main source of revenue for the company. In 2023, the company achieved construction, operation, and financial revenue of HK$76.8 (42% year-on-year decrease), 191.8 (2% year-on-year increase), and HK$5.23 billion (year-on-year decrease of 2%), respectively. The share of operating and financial revenue reached 76%, an increase of 11 percentage points over 2022. Judging from the revenue structure, the share of construction revenue has declined, and the company is expected to officially enter the operational harvest period, shifting from epitaxial growth to contextual growth.

Capital expenditure has slowed sharply, and free cash flow is close to positive. After including capital expenditure as investment cash flow, net operating cash flow after restoration in 2023 was approximately HK$7.5 billion, capital expenditure was approximately HK$7.8 billion, and free cash flow was close to positive. The company's capital expenditure is expected to continue to decline in 2024, and free cash flow is expected to improve. The company paid two dividends in the middle of 2023 and at the end of the year. The annual dividend ratio is about 30%. After the free cash flow is positive, the company's dividend ratio is expected to increase.

The leading position in the waste-to-energy industry has been further consolidated, and profits are basically the same as last year. Backed by Everbright Group's strong shareholder strength, the company's waste treatment scale has continued to grow over the past 20 years. The company's domestic waste treatment capacity increased to 0.1,589 million tons/day by the end of 2023, continuing to be the world's largest investment operator for waste power generation. The company achieved an EBITDA of HK$9.079 billion in 2023, roughly the same as the same period last year ($9.056 billion in 2022).

Profits in the water sector have been growing steadily. By the end of 2023, Everbright Water had a municipal sewage treatment capacity of 5.77 million tons/day, industrial wastewater treatment capacity of 0.416 million m3/day, and a water supply capacity of 0.25 million m3/day. Sewage treatment projects are mainly located in eastern Tier 1 and 2 cities. Sewage treatment costs are high, which guarantees high profits. Environmental water services achieved EBITDA of 2.475 billion yuan in 2023, an increase of 13.58% year over year (HK$2.179 billion for the same period in 2022)? Green environmental performance declined, and biomass subsidies were accelerated in 2024, and subsidy repayments helped improve cash flow conditions. Affected by the expiration of national subsidies for some projects, Green Environmental Protection achieved an EBITDA of HK$1.48 billion in 2023, a year-on-year decrease of 33.7% (HK$2.234 billion for the same period in 2022). Furthermore, according to Everbright's Green Environmental Protection Notice, a total of 16 national settlement notices for biomass projects have been received as of March 8 in 2024, totaling about 1.534 billion yuan, and 1.377 billion yuan has already been paid. Subsidy repayments have helped improve cash flow.

Profit forecast and rating: Based on the company's 2023 performance, we raised the company's 2024-2025 net profit forecast to HK$4.573 and 4.715 billion respectively (HK$4.115 and HK$4.25 billion before adjustment), and added the 2026 net profit forecast to HK$4.84 billion. The PE corresponding to the current stock price is 4.1, 4.0, and 3.9 times, respectively. The company's valuation level is more than 50% lower than that of comparable companies. Based on a 30% dividend ratio, the 2024 dividend rate is 7.5%, maintaining a “buy” rating.

Risk warning: 1) Project progress falls short of expectations; 2) Changes in subsidy policies; 3) Increased industry competition.