Incident: 1) The company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of HK$16.14 billion, down 4.2% year on year, and realized net profit to mother of HK$2.45 billion, down 11.9% year on year, in line with our expectations. 2) The company issued an interim dividend announcement. It plans to pay an interim dividend of HK$0.14 per share, the same as the same period last year, accounting for 35.1% of net profit returned to mother in the first half of the year, an increase of 4 percentage points over the same period last year.

Capital expenditure has declined, construction revenue has declined, and the company's performance has declined. In the first half of 2024, the company achieved revenue of HK$16.14 billion, of which construction service revenue was HK$3.58 billion, accounting for 23%, and operating services revenue of HK$9.46 billion, accounting for 61%, and financial revenue of HK$2.57 billion, accounting for 16%. Compared with the same period last year, construction service revenue declined significantly, mainly due to a sharp drop in the energy and environmental protection (i.e. waste incineration) component. On the gross profit side, the company's gross margin for the first half of 2024 was 38.7%, down 5.4 percentage points from the same period last year. It is expected that the gross margin mainly in the construction business will drop significantly. On the cost side, the company's fee reduction effect in the first half of 2024 was obvious. Financial expenses were reduced by 0.2 billion Hong Kong dollars year on year, management expenses were reduced by 0.24 billion Hong Kong dollars year on year, and the overall cost ratio decreased by 1.9 percentage points. Under the combined influence, the company's net profit to mother in the first half of the year was 2.45 billion yuan, a decrease of 12% year on year. However, it is worth emphasizing that since construction revenue was only an adjustment of accounting standards and did not actually bring in cash inflows, the company's cash flow actually improved further in the first half of the year.

The interim dividend for the first half of the year was the same as the same period last year, reflecting the importance the company attaches to shareholder returns. At the same time as the semi-annual report was released, the company also issued an interim dividend announcement. It plans to pay an interim dividend of HK$0.14 per share. The absolute value is the same as the same period last year. The dividend payment rate increased by 4 percentage points over the same period last year, reaching 35.1%. Assuming the company's annual dividend rate is 30%-35%, and the current dividend rate of the company is 5.7%-6.7%, the dividend value is prominent.

Capital expenditure declined, and the company's free cash flow forecast for the first half of the year was corrected. According to the accounting and measurement rules of the BOT business, the company recognizes construction revenue during the construction phase of the project, so the current year's construction revenue can be roughly regarded as annual capital expenditure. According to the company's announcement, the company's construction service revenue for 2022 to 2023 was HK$13.21/7.68 billion, and the H1 in 2024 was HK$3.58 billion. Considering that the company has few projects under construction, it is expected that the company's capital expenditure will be further reduced in the late 14th Five-Year Plan period. In terms of cash flow from operating activities, the Hong Kong accounting standards classify most of the capital expenses related to BOT project construction as operating cash outflows. If this is adjusted, the company's net cash flow from operating activities after the adjustment will exceed HK$7 billion in 2023, and the company's free cash flow estimate for the first half of this year has been corrected.

The amount of national compensation arrears is large. If they are recovered one after another, the company's cash flow will improve further. The company has formed a large amount of accounts receivable in the past business process. As of the end of June 2024, the company's accounts receivable and notes were HK$21.4 billion. It is estimated that a large proportion of this amount is due to national compensation arrears. If recovered one after another, the company's cash flow level will further improve. On March 12, 2024, Everbright Green (Everbright Environmental holds 69.7% of its shares) announced that from January 1 to March 8, 2024, 16 agricultural and forestry biomass power generation project companies received supplementary settlement notices, with a total settlement amount of approximately RMB 1.534 billion (as of the end of 2023, Everbright Green has HK$7.9 billion in accounts receivable and notes). We believe that biomass power generation projects are difficult to operate, and that cash flow is dragging down the survival of enterprises. National compensation arrears are expected to be disbursed one after another. Everbright Environment currently accounts for a relatively high share of accounts receivable, and if subsidies are paid out, they will significantly improve the level of cash flow.

Profit forecast and rating: We maintain the company's 2024-2026 net profit forecasts of HK$4.14, 4.31, and 4.49 billion, respectively. The PE corresponding to the current stock price is 5.2, 5, and 4.8 times, respectively. Assuming that the 2024-2026 dividend rate remains 30%, the company's dividend rates for 2024-2026 are 5.7%, 6%, and 6.2%, respectively, maintaining a “buy” rating.

Risk warning: Project commissioning progress falls short of expectations, and subsidy policies fluctuate