Description of the event

Longjing Environmental Protection released its 2024 three-quarter report. The company's revenue for the first three quarters was 6.654 billion yuan, down 11.6% year on year; net profit to mother was 0.647 billion yuan, up 0.9% year on year; net profit after deducting non-return to mother was 0.585 billion yuan, up 18.2% year on year; of these, Q3 revenue was 1.982 billion yuan, down 23.5% year on year; net profit to mother was 0.216 billion yuan, up 1.1% year on year; net profit without return to mother was 0.194 billion yuan, same year on year The ratio decreased by 3.0%.

Incident comments

It is speculated that the 2024Q3 revenue growth rate declined a lot mainly due to the company's shrinking the size of low-quality contracts. In mid-2023, the company revised and perfected the “Sales Contract Quality Management System”, and strictly controlled and contracted projects that did not meet the company's gross margin control line and advance contract. Currently, it has entered a period of phased revenue growth deceleration, and the decline in revenue is not due to deterioration in operations.

Q3 gross margin/net margin increased by 1.97 pct/2.65 pct year on year, and profitability continued to rise. Q1/Q2/Q3 net interest rates were 8.73%/9.71%/10.90%, respectively, and profitability increased quarterly. Q3 net profit achieved positive growth despite declining revenue, mainly due to: 1) Continuous fulfillment of high-quality orders: Since the revised contract system, the company has focused on the quality of newly signed contracts. The gross margin of the 2024H1 environmental protection equipment manufacturing business is 23.83%, higher than 23.39% of 2023A. Q3 has entered a period of accelerated fulfillment of high-quality orders; 2) The new energy business with high gross margin has begun to contribute to performance: 2024H1 The gross margin of the new energy business was 27.9%, higher than the gross profit margin of the flue gas treatment business of 23.83%; the first phase of the Laguocuo project was put into operation on March 29, and the first phase of operation in Kerzhou was put into operation on July 19. The high-margin green power business made a positive contribution to the company's profitability. The cost rate increased by 2.86 pct during the Q3 period, and the sales/management/ R&D/finance cost ratio increased by 0.79 pct/1.30 pct/0.50 pct/0.27 pct, respectively. It is estimated that the battery, green power, and mining card businesses have all been in the early stages of commissioning since this year. Expenses have been incurred but production capacity is still climbing, leading to high related cost rates, and there are improvement expectations.

Cash flow continues to be optimized, interest-bearing debt ratio is low, and funds on hand are abundant. The net cash flow from 2024Q1-3 operating activities was 1.164 billion yuan, up 101% year on year, the revenue ratio increased by 10 pct to 81% year on year, and the net cash ratio increased 90 pct to 180%. The special repayment campaign was very effective. The balance ratio at the end of 2024Q3 was 68.9%, and the interest-bearing balance ratio of 23.6% was low; if future debt-to-equity conversion was taken into account, the debt ratio dropped to 62.1%. If the debt ratio was raised to 70%, 7.06 billion yuan could be borrowed as capital expenditure (13.82 billion yuan could be raised if the debt ratio increased to 75%), and the 2024Q3 final company had 2.65 billion yuan in monetary capital. The capital was abundant, which guaranteed subsequent business progress.

Environmental orders are plentiful, and quality is improving. At the end of 2024Q3, the environmental protection project contract was 19.213 billion yuan, and Q1-3 added 7.544 billion yuan (-4.8% year-on-year), of which electric/non-electricity accounted for 60.08%/39.92%. As can be seen from the Q3 revenue performance, new orders declined slightly, but support for the performance did not weaken.

The energy storage business is progressing smoothly during the construction of the nearly 1GW wind and green power project. In 2023, the company signed a contract for over 2 GW mine green power projects. More than 27 projects are under construction (with a scale of nearly 1 GW). The Laguocuo Phase I Phase/Phase I projects have already been put into operation. The first phase of Duobaoshan is expected to be put into operation in Q4; an order of 1.284 billion yuan for energy storage is in hand at the end of 2024Q3.

Profit prediction and valuation: The company has clarified the “environmental+new energy” two-wheel drive strategy. The main environmental protection business has strong ability to take orders. Green Power has begun to contribute to performance, the energy storage business is expanding smoothly, and it has entered the mining equipment business; since the end of October 2023, Zijin has announced 9 times to increase its holdings by more than 1%. The company is expected to achieve net profit of 1.053/1.405/1.705 billion yuan in 2024-2026, up 106.8%/33.5%/21.3% year over year, corresponding to PE valuation of 13.6x/10.2x/8.4x. Give it a “buy” rating.

Risk warning

1. Competition for flue gas control intensifies and profit levels fluctuate; 2. The energy storage industry is fiercely competitive and profitable.