Investment highlights:

A leader in the environmental protection industry, with a broad business layout, waste incineration treatment capacity of 0.1589 million tons/day.

The company has three major sectors, including environmentally friendly energy, environmentally friendly water, and green environmental protection. It is the first one-stop, comprehensive environmental management service provider in China; its business covers 26 provinces (cities), autonomous regions, Hong Kong, Germany, Poland, Vietnam, Mauritius, etc. By the end of 2023, the company's environmental energy and green environmental protection sector had implemented a total of 191 waste-to-energy projects and designed a domestic waste treatment capacity of 0.1,589 million tons/day, making it the world's largest waste-to-energy investment operator. In addition, the company also has a sewage treatment capacity of 74.681 billion cubic meters/day and a biomass treatment capacity of 8.1398 million tons/year; the business layout is extensive.

The company gradually moved from an expansion period to a mature period of operation. Operating revenue increased steadily, and cash flow reached an upward inflection point. In 2018-2021, the company was in a period of rapid expansion. New project construction revenue was the company's main source of revenue, accounting for more than 50%. At the same time, the company continued to have a net cash flow outflow from operating activities, high capital expenditure, and a high scale of debt financing. Starting in 2022, as most of the company's projects were implemented and the scale of new projects decreased, the company gradually entered the operation stage from the expansion period, and the share of operating service revenue increased 16.08pct to 50.41% year-on-year, and further increased to 59.80% in 2023. At the same time, the company's capital expenditure decreased, net cash flow from operating activities became positive, and cash flow showed an upward inflection point.

The national reimbursement surpassed expectations. In the first quarter of 2024, 16 agricultural and forestry biomass power generation project companies under the Group received a settlement notice from the State Grid Corporation on additional subsidy funds for renewable energy electricity prices. The total settlement amount in the notice reached 1.534 billion yuan, of which the additional subsidy funds for renewable energy electricity prices that have already been paid were 1.377 billion yuan.

The dividend rate is high all year round, and the dividend ratio far exceeds that of other companies in the same industry. Since 2015, the company's dividend payment rate has remained above 30%. In 2022, despite declining profits, the company's total cash dividend still reached HK$1.474 billion, and the dividend payment rate reached 32.04%. By the end of 2023, the company announced an interim dividend of 14.0 HK cents per share, and plans to pay a final dividend of 8.0 HK cents per share, with a total dividend of 22.0 HK cents per share. The total cash dividend amount reached HK$1.351 billion, the dividend payment rate reached 30.51%, and the dividend ratio reached 8.66%, leading other companies in the same industry.

Profit forecast and investment rating We believe that the company's cash flow has improved markedly, the country's reimbursements have exceeded expectations, the report quality is expected to improve markedly, and the dividend rate is high all year round. The dividend ratio far exceeds that of other companies in the same industry, and the investment cost ratio is high; the company's operating income for 2024-2026 is 31.868/31.965/30.616 billion HK$, respectively, and the net profit to the mother is 4.204/4.404/4.471 billion, corresponding to PE 5.41/5.16/5.08 times, respectively. Covered for the first time, a “gain” rating was given.