Description of the event

High Energy Environment released its 2024 mid-year report. In the first half of the year, revenue was 7.545 billion yuan, up 68.9% year on year; net profit to mother was 0.416 billion yuan, down 15.8% year on year; net profit after deducting non-return to mother was 0.412 billion yuan, down 4.3% year on year.

Among them, Q2 revenue was 4.42 billion yuan, up 61.7% year on year; net profit due to mother was 0.222 billion yuan, down 22.9% year on year; net profit after deducting non-return to mother was 0.247 billion yuan, down 0.5% year on year.

Incident comments

Revenue from the hazardous waste recycling sector has increased, and revenue from the engineering business has been dragged down. The company's revenue increased in the first half of this year, by business segment: 1) Solid waste and hazardous waste resource utilization: revenue of 5.68 billion yuan, up 129% year on year; of these, Jiangxi Xinke project was fully put into operation in the first half of the year, and Chongqing Yaohui also completed technical upgrading in February, increasing production capacity utilization. At the same time, metal prices were high in the first half of the year; 2) Environmental operation services: revenue 0.88 billion yuan, an increase of 9.1% over the previous year; waste incineration projects actively developed multiple businesses such as heating and steam supply on the basis of smooth operation; 3) Environmental engineering: revenue 0.99 One billion yuan, a year-on-year decrease of 16.8%, mainly due to the company's control over the quality of tender projects and delays in the construction progress of some projects.

Profitability is under pressure. Net profit margin for the first half of this year was 6.12%, down 5.9pct year on year; gross profit margin was 14.3%, down 7.6pct year on year, of which: gross profit margin for solid waste recycling was 8.76%, down 2.90pct year on year, related to the Jinchang project's increase in procurement costs due to technical reform and market competition in the first half of the year; environmental protection operation services increased by 5.61 pct year on year, and improved waste incineration operation capacity; environmental engineering gross profit margin of 16.61%, down 13.49 pcts year on year, due to the decline in gross margin for new orders and settlement of some projects Costs have increased in the current period. Furthermore, the investment income for the first half of last year was 0.13 billion yuan (futures profits and income from reduced shareholding in Yuhetian), and this year it was -0.007 billion yuan.

Cash flow from operating activities declined month-on-month in Q2. Net cash flow from operating activities in the first half of the year was $0.11 billion, of which Q1 and Q2 were 0.1 billion yuan and 0.01 billion yuan respectively. The large month-on-month decline in Q2 may be related to the increase in inventory of the company's Jinchang project and Xinke project, and production has not yet been converted into products to complete sales. The capital expenditure for 2021-2023 was 1.98 billion yuan, 2.61 billion yuan, and 1.51 billion yuan respectively. Currently, there are few projects under construction, and future capital expenditure is expected to continue to decline.

Implement large mid-term dividends. The company plans to distribute a cash dividend of 0.33 yuan (tax included) to all shareholders. The total proposed cash dividend of 0.503 billion yuan (tax included) is calculated, and the semi-annual dividend ratio is about 120.91%.

Profit prediction and valuation: Hazardous waste recycling projects for high-energy environments in 2023 are still at a turning point. The Jiangxi Xinke, Chongqing Yaohui, and Gansu Jinchang projects all fell short of expectations at the beginning of operation and are undergoing continuous technical improvements; since 2024Q1, with the completion of the renovation of Jiangxi Xinke and Chongqing Yaohui, Jinchang Phase II has been put into operation; it is expected that the company's existing projects will gradually achieve stable profits in the future. The estimated net profit for 2024-2026 is 0.856 billion yuan, 0.992 billion yuan, and 1.167 billion yuan, corresponding to PE valuations of 8.3x, 7.2x, and 6.1x. Maintain a “buy” rating.

Risk warning

1. The operational stability of hazardous waste recycling projects falls short of the expected risk; 2. The production capacity utilization rate falls short of the expected risk due to the low amount of hazardous waste collected.