Incident: The company released its 2024 semi-annual report. 24H1 achieved operating income of 2.916 billion yuan, -15.67% year-on-year, and net profit of 0.704 billion yuan to mother, +17.77% year-on-year. 2024Q2 achieved operating income of 1.373 billion yuan, -25.79% year-on-year, and net profit to mother of 0.286 billion yuan, or -10.54% year-on-year.

The sewage treatment business grew steadily, and the gross margin of PPP projects increased significantly. In 2023, the company completed major asset purchases, acquired a purification company for 4.51 billion yuan, and injected high-quality sewage treatment and sludge treatment assets. The main business advantage was more prominent. 24H1 sewage treatment capacity reached 0.46 billion cubic meters, used 28.9516 million cubic meters of recycled water, supplied 7.75 million cubic meters of tap water, and treated 0.389 million tons of sludge. 24H1 achieved revenue of 1.253 billion yuan in sewage treatment business, +28.99% year over year, gross margin of 56.41%, +0.25pct year on year. In terms of PPP projects, as PPP projects were transferred into operation one after another, and the number of projects under construction decreased. 24H1's PPP project revenue was 1.229 billion yuan, a year-on-year decrease of 40.41%, but gross margin increased significantly, reaching 38.32%, +18.1pct year-on-year.

Sewage treatment production capacity continues to increase, and many projects can be expected to be put into operation. The Zhengzhou New Area Sewage Treatment Plant (Phase II) sewage treatment project (0.35 million m3/day) and the Zhengzhou New Area Sewage Treatment Plant (1 million m3/day) upgrading and renovation project under the company's administration were officially put into commercial operation on January 1, 2024. In addition, the sludge treatment facility for the second phase of the Zhengzhou New Area Sewage Treatment Plant project has completed civil construction and equipment installation work and is being commissioned; the first phase of the Nancao Sewage Treatment Plant project has completed the installation of major equipment on the main process routes.

Operating cash flow improved, and accounts receivable increased significantly. The net cash flow from 24H1's operations was -0.39 billion yuan, mainly due to a decrease in the number of projects under construction of the company's PPP projects and lower expenses. In terms of accounts receivable, as of the end of June 2024, the company's accounts receivable reached 5.513 billion yuan, an increase of 1.581 billion yuan over 24Q1.

Investment advice and valuation: The company's revenue for 2024-2026 is estimated to be 7.752 billion yuan, 7.878 billion yuan, and 7.98 billion yuan, respectively, with growth rates of -0.8%, 1.6%, and 1.3% respectively, and net profit to mother of 1.143 billion yuan, 1.297 billion yuan, and 1.407 billion yuan, respectively, with growth rates of 32.9%, 13.5%, and 8.5% respectively, maintaining the “increase in holdings” rating.

Risk warning: Higher risk of interest-bearing debt ratio, higher risk of accounts receivable, risk of water environment treatment investment falling short of expectations, risk of lower sewage treatment costs.