Target price of HK$4.96, maintaining “Buy” rating

Everbright Environmental announced 1H24 results on August 26: Revenue fell 4% year on year to HK$15.612 billion, including construction/operation/finance revenue of HK$3.58/9.46/2.57 billion (1H23:4.12/9.49/2.69 billion), and net profit to mother fell 12% year over year to HK$2.454 billion. We maintained our 24-26 net profit forecast of HK$4.148/4.282/4.391 billion, giving the company 7.3 times the 2024 forecast PE (comparable to the company Wind's consistent expected average: 7.3 times), and the target price was HK$4.96 (previous value: HK$5.10), maintaining a “buy” rating.

Revenue from operating services declined slightly, and garbage disposal volume was +9% year-on-year

Everbright Environmental is the world's largest waste-to-energy investment operator. As of June 30, the company's environmental energy and green environmental protection sectors have implemented a total of 191 waste-to-energy projects (including commissioned operation projects), with a domestic waste treatment capacity of 0.1589 million tons/day. The company's operating services revenue in the first half of the year was HK$9.46 billion (HK$1H23:9.49 billion), accounting for 61% (1H23:58%) of total revenue. The company completed 28 million tons of garbage disposal, +9% year-on-year, and generated 13.6 billion kilowatts of electricity, +5% year-on-year. Environmentally-friendly energy waste-to-energy generates 446 kilowatts of electricity per ton, and the plant's electricity consumption rate is 15%. Two waste-to-energy projects have been approved to increase waste disposal fees.

We expect that in the next few years, Everbright Environment will strengthen its market position with its broad industrial chain layout.

Construction service revenue was -13% year over year, and the construction service revenue of the 11 1H24 Environmental Energy project management companies fell 13% year over year to HK$3.584 billion, accounting for 23% of total revenue (1H23:25%). As of June 30, 153/6 environmentally friendly energy waste-to-energy power generation projects have been put into operation/under construction, with an annual processing capacity of 50.37/2.08 million tons (including commissioned operation projects). Construction of 5 1H24 environmental energy projects began, with a daily treatment scale of 1000/375 tons of domestic waste/food waste, 11 projects completed and put into operation, and a daily treatment scale of 3,700/425 tons of domestic waste/food waste.

1H24 dividend payout ratio is 35%, and free cash flow is expected to continue to improve

1H24 paid an interim dividend of HK$0.86 billion, corresponding to DPS of HK14.0 cents, which was the same as the previous year, with a payout ratio of 35%. From January to January 2024, 16 project companies under Everbright Green Environmental Protection received a notice from the State Grid Corporation on the settlement of additional subsidy funds for renewable energy electricity prices. According to the notice, the total settlement amount was approximately RMB 1.534 billion. As projects under construction are put into operation one after another, operating income increases, capital expenditure decreases, and national reimbursement payments improve, we believe that the quality of the company's operations and free cash flow will further improve. As a leading environmental management company, the company is leading in scale in solid waste and water treatment, and cash flow continues to improve, which is expected to usher in a revaluation.

Risk warning: Construction service revenue fell more than expected, waste-to-energy project operation risks, collaborative development of solid waste treatment fell short of expectations, competition for biomass power generation and hazardous waste disposal intensified.