Key points of investment:
Incident: The company released its 2024 mid-year report. 24H1's revenue was 1.834 billion yuan, yoy +3.86%; net profit to mother was 0.422 billion yuan, yoy -6.96%; after deducting non-net profit of 0.4 billion yuan, yoy -4.82%, the performance was in line with expectations.
The decline in the company's profit was mainly affected by a 7 pct year-on-year decline in gross margin due to a significant increase in depreciation. According to the announcement, 24H1's gross margin was 42.68%, a year-on-year decline of 6.76 pct. We believe this was mainly due to the company's fund-raising project last year, a sharp increase of 2 billion in fixed assets from 11 billion in 23Q2 to 13 billion in 23Q3, and an increase in current depreciation in 24H1 (24H1 depreciation and amortization of 0.446 billion yuan, 23H1 was 0.4 billion yuan).
The reduction in bad debt accruals by 0.066 billion yuan brought a certain increase in the company's profits. In April 2024, the company issued a special explanation notice on changes in accounting estimates. On the basis of the original accounts receivable portfolio, the “account age portfolio” was further broken down, and the expected credit loss rate calculation models for the “government customer portfolio”, “power grid customer portfolio” and “renewable energy subsidy package” were revised. According to the announcement, 24H1's bad debts accrued at 0.076 billion yuan, compared with 0.141 billion yuan at the end of 2023, resulting in a return of 0.066 billion yuan.
24H1's waste incineration processing capacity increased by 8.31%, capacity utilization rate was about 71%, and tons of feed-in electricity were about 483 degrees. According to the announcement, the company controlled 14 waste incineration power generation projects, with a production capacity of 0.032 million tons/day, of which 0.03 million tons were located in Guangzhou, with a total disposal of 4.1756 million tons of garbage, yoy +8.31%; achieved a total power generation of 2.37 billion degrees, yoy +5.33%; and achieved feed-in electricity of 2.015 billion degrees, yoy +5.23%.
Waste disposal in biomass projects increased by 35% year-on-year, and the capacity utilization rate reached 78%. At the same time, the company wholly operated 4 biomass treatment projects, all located in Guangzhou, providing biomass (biomass waste such as food waste, food waste, dead livestock, feces, etc.) treatment services. The project treated 0.3665 million tons of waste, an increase of 34.99% over the previous year, and the capacity utilization rate reached 78%.
The company's project was fully put into operation, and free cash flow increased significantly from 0.076 billion yuan of 23H1 to 0.5 billion yuan. According to the announcement, 24H1's net operating cash flow was 0.908 billion yuan, yoy +8.83%, but during the same period, Capex dropped sharply from 0.758 billion yuan to 0.408 billion yuan. As a result, the company's free cash flow increased significantly, and is expected to continue to increase in the future.
Investment analysis opinion: Considering the short-term increase in depreciation and the impact of garbage blending progress, we slightly lowered the 2024-26 net profit forecast to be 0.836/0.983/1.202 billion yuan (0.91/1.088/1.311 billion yuan), respectively. The current market value corresponds to the company's 2024-26 PE is 14/12/10 times. We continue to be optimistic about the company's scarcity of Guangzhou waste incineration assets, performance growth, and the company's commitment to 60% high dividend for three years (the company's actual dividend rate in 2023 is about 64 %), maintaining a “buy” rating.
Risk warning: the risk of not being able to fully absorb the new production capacity, the risk of declining revenue from the Li Keng factory, the risk of not being able to renew the company's project agreement after it expires, and the risk of declining national subsidies and bidding.