Investment highlights:

Start with leachate to achieve a diversified layout of water, solid waste, and green energy. The company was founded in 2009 as a national-level specialized and innovative “little giant” enterprise. It initially engaged in landfill leachate treatment business and expanded water and solid waste business one after another. Currently, it has formed a “water treatment+solid waste disposal+green energy+high-end equipment manufacturing” business layout, while continuously expanding the third-party service business, and has achieved a new “4+1" business development pattern.

The company has rich experience in traditional environmental protection operations and has sufficient orders. 1) In the field of water environment, there are nearly 5 billion yuan in on-hand orders. By the end of September 2024, the company had announced 6.08 billion yuan of water environment treatment orders since its listing, of which orders for general construction models, commissioned operation, and equipment supply totaled about 2.456 billion yuan, and total investment and construction model orders totaled 3.623 billion yuan. By the end of March 2024, the cumulative settlement contract amount under the company's general construction model was 1.164 billion yuan. We estimate that by the end of September 2024, the company's current order scale under the general construction model was about 1.292 billion yuan; the current order scale for the investment and construction model was about 3.623 billion yuan; and the total amount of in-hand orders for water environment was about 4.916 billion yuan. 2) The comprehensive solid waste business has not yet delivered sufficient orders. In 2023, the company re-optimized its solid waste disposal business and clearly laid out the business layout around sludge treatment, integration of urban and rural sanitation, and fly ash disposal. As of the end of March 2024, the company's main solid waste contract amount was about 3.141 billion yuan. 3) An investment agreement of over 7 billion yuan was added in October 2024. In October 2024, the company signed an “Investment Agreement” with the Nanning Housing and Urban-Rural Development Bureau and the Nanning High-tech Industrial Development Zone Management Committee, with a total investment of about 7 billion yuan; it will actively participate in Nanning's investment environment management facilities and high-end equipment manufacturing industry projects in accordance with the principle of marketization. 4) As of October 10, 2024, the company has announced a total environmental order amount of 16.42 billion yuan. According to the 2024 tracking rating report of Tianyuan Environmental Protection Wuhan Tianyuan Environmental Protection Co., Ltd., excluding completed orders up to the end of March 2024, the total amount of environmental orders in hand is 15.256 billion yuan.

Hydrogen energy and photovoltaics help expand the second growth curve. 1) The company has signed an investment cooperation agreement with the Yangzhou Jiangdu District People's Government to invest 1 billion yuan to build a hydrogen energy equipment R&D and manufacturing base covering an area of about 80 acres, with the aim of providing high-quality hydrogen energy equipment and complete supporting facilities. Once the project is fully completed, it is expected to generate an annual production capacity of 0.12 millionnm/HALK (alkaline water electrolysis) electrolyzer and 30,000 nm/HSOEC (solid oxide electrolyzer) equipment. 2) The company plans to invest in the Huyanghe Bingdi Integrated 2GW PV project of the Seventh Division, covering an area of about 0.035 million acres, with a total investment of about 3.02 billion yuan. The annual effective utilization hours of the project can reach 1,400-1600 hours. The annual Internet volume after completion of the project is expected to exceed 1.4 billion kWh, with an annual output value of about 0.35 billion yuan.

Deeply cooperate with universities in research and development, and continue to explore new growth points. The company continues to increase investment in science and technology research and technology introduction. It has successively cooperated with well-known universities and research institutes in China, set up joint school-enterprise centers and pilot R&D platforms, and hired academicians from the Chinese Academy of Engineering and senior industry experts as consultants. It has also collaborated with Huazhong University of Science and Technology to develop recycling technology for waste incineration fly ash, Xi'an Jiaotong University to jointly develop hydrogen energy equipment manufacturing technology, and the Guangzhou Institute of Energy of the Chinese Academy of Sciences to explore the development and application of technologies such as dismantling and recycling of new energy vehicles.

Profit forecast and investment rating We believe that the company has sufficient orders in hand to guarantee future performance. At the same time, the second growth curve is gradually being implemented to continue to explore new business growth poles; the company's revenue for 2024-2026 is estimated to be 2.726/3.99/5.098 billion yuan, respectively, and net profit to mother is 0.404/0.642/0.833 billion yuan, corresponding PE is 14/9/7 times, respectively. For the first time, coverage is given.

Risks suggest that progress in improving water environment and solid waste revenue falls short of expectations; risk of declining gross margin; accounts receivable recovery progress falls short of expectations; implementation of the second growth curve and profitability fall short of expectations; and progress of ongoing research projects falls short of expectations.