Incidents:

On August 26, 2024, Everbright Environmental announced 2024 interim results: in the first half of 2024, the company achieved operating income of HK$15.612 billion, down 4% year on year; realized net profit to mother of HK$2.454 billion, down 12% year on year; the board of directors announced the payment of an interim dividend of HK14 cents per share for the six months ended June 30, 2024, the same as the same period last year; the dividend ratio was 35%, up 4 pcts year over year.

Investment highlights:

The share of operating revenue has increased, and the revenue structure has been optimized. In the first half of 2024, the company's operating service revenue, construction service revenue and financial revenue were HK$9.46 billion, HK$3.58 billion and HK$2.57 billion respectively, accounting for 61%, 23% and 16% of total revenue respectively. Construction revenue decreased by 2% compared to the same period in 2023, the share of operating service revenue increased by 2%, and the share of operating service revenue further increased, and the company gradually entered the operation stage.

Core business indicators have been rising steadily. In the first half of 2024, the company's domestic waste disposal capacity reached 28 million tons, up 9% year on year; agricultural and forestry waste treatment capacity was about 3.9 million tons, up 4% year on year; power generation capacity was about 13.6 billion kilowatt-hours, up 5% year on year, and heating steam supply increased by more than 60% year on year; sewage and waste power generation project leachate treatment capacity was about 0.84 billion cubic meters, which is basically the same as the same period last year; environmental equipment export contracts increased 9% over the first half of 2023.

Actively expand the market and maintain a leading position in the industry. In the first half of 2024, the company implemented a total of 8 new investment projects, with a total investment of about 1.611 billion yuan, involving sewage treatment, biomass comprehensive utilization, zero-carbon park construction, energy storage, etc.; the additional contract amount was about 0.392 billion yuan, and the new business covered categories such as environmental restoration, technical consulting, engineering consulting, equipment supply, battery recycling and reuse. As of June 30, 2024, the company has invested in 600 environmental protection projects, with a total investment of about 162.272 billion yuan, including 191 waste-to-energy projects (including commissioned operation projects), and 0.1,589 million tons of domestic waste were treated on a design day.

The proportion of projects put into operation is high, and there are few new projects. 1) Environmental energy: As of 2024.6.30, the sector has invested in 281 projects, with a total investment of about 98.324 billion yuan, and undertook 2 commissioned operation projects and 2 EPCO projects; the total project design scale is about 53.78 million tons/year to treat household waste, of which the project scale is about 50.37 million tons/year, and the scale of the project under construction is about 2.0805 million tons/year. 2024H1 has started 5 new environmental energy projects, designed to treat household waste at a scale of 1,000 tons/day and a food waste treatment scale of 375 tons/day; 11 projects have been completed and put into operation, designed to treat 3,700 tons/day of domestic waste and 425 tons/day of food waste. 2) Everbright Water: As of 2024.6.30, the sector has invested in a total of 169 projects, with a total investment of about 32.151 billion yuan, and also undertook 7 commissioned operation projects and 3 EPCO projects; the project design scale is 2.373 billion cubic meters of sewage treatment, 0.115 billion cubic meters of reclaimed water per year, 0.31 billion cubic meters of water supply, 0.7939 million tons of sludge per year, etc.

Among them, the design processing scale of the project already in operation is 2.229 billion cubic meters/year, and the design processing scale of the project under construction is 0.387 billion cubic meters/year. 2024H1, Everbright Water added 3 new projects, with a total investment of about 1.371 billion yuan, undertook various new asset-light business contracts totaling about 30.25 million yuan, and added 0.2 million cubic meters/day of sewage treatment capacity. 3) Green environmental protection: As of 2024.6.30, the sector has invested in 145 projects, with a total investment of about 31.176 billion yuan. The project design scale is 8.2098 million tons of biomass raw materials, 4.2158 million tons of domestic waste per year, 2.4664 million tons of hazardous waste per year, and the installed capacity of photovoltaic power generation, wind power and energy storage projects reached 276.05 MW. 2024H1 has started 4 new projects in the green environmental protection sector, involving 60.19 MW of installed capacity of photovoltaic power generation, 2.2 MW of energy storage project and 2 environmental restoration projects; 4 other projects have been completed and put into operation. The design scale is 0.146 million tons of biomass raw materials per year, 9.59 MW of photovoltaic power generation installed capacity, and 3 environmental restoration projects have been completed and delivered.

Gross profit margins have declined, and accounts receivable repayments have accelerated. In the first half of 2024, the company's gross margin was 38.73%, a year-on-year decrease of 5.41pct. The company's green environmental protection sector settled the national compensation arrears of 1.534 billion yuan in March, making it the largest recovery of national compensation arrears in recent years; the amount of environmental energy and environmental water receivables recovered increased by about 11% and 21% over the same period last year.

Profit forecast and investment rating We believe that the company's cash flow has improved significantly, the repayment rate is high, and the investment cost ratio is high; the company's operating income for 2024-2026 is HK$31.868/31.965/30.616 billion, respectively, and net profit attributable to mother is HK$4.202/4.372/4.385 billion, respectively, corresponding PE is 5.16/4.96/4.95 times, maintaining the “increase in holdings” rating.

Risks indicate that the progress of increasing operating income falls short of expectations; the risk of falling gross margin; the recovery of accounts receivable falls short of expectations; the risk of falling dividend rates; and the risk of a decline in construction revenue exceeding expectations.