Key points of investment

Incident: In the first three quarters of 2024, the company achieved revenue of 6.213 billion yuan, an increase of 9.17%; net profit to mother of 1.626 billion yuan, an increase of 9.14%; net profit after deducting non-attributable net profit of 1.603 billion yuan, an increase of 9.45%; and a weighted average ROE of 0.26 pct to 9.43%.

Performance grew steadily, and 2024Q3 credit impairment losses slowed. 2024Q3's revenue in a single quarter was 2.205 billion yuan, -0.29% YoY, +1.97% month-on-month, net profit of 0.698 billion yuan, +8.57% YoY, and +48.14% month-on-month. The flat revenue in the single quarter was mainly due to factors such as one-time traceability revenue from leachate and sewage during the same period of the year and a decline in engineering revenue. 2024Q3 credit impairment losses accrued 0.011 billion, -7.08% year over year, -72.47% month on month, and improved receivables. 2024Q1-3's gross sales margin was 44.76%, +1.58pct year on year, net sales margin 26.87%, +0.06pct year; 2024Q3 single quarter gross sales margin was 47.81%, +2.20pct year on year, net sales margin 32.37%, +2.69pct year on year.

On bond repayment, 2024Q3 interest charges fell month-on-month. In the first three quarters of 2024, the company's expenses increased 19.20% year-on-year to 0.696 billion yuan. Among them, sales, management, R&D, and financial expenses increased by 11.53%, 10.96%, 192.12%, and 28.88% to 0.93, 0.324, 0.018, and 0.261 billion yuan, respectively; sales, management, R&D, and finance expenses increased by 0.03pct, 0.08pct, 0.19pct, 0.64pct to 1.50% and 5.22%, respectively. 0.30%, 4.20% Among them, 2024Q3 interest expenses were 0.119 billion yuan, -4.24% year over year and -9.22% month over month, mainly due to bond repayment.

The net operating cash flow of 2024Q1-3 increased 19% over the same period, and the net present ratio increased. 2024Q1-3, Company 1) Net operating cash flow of $2.147 billion, +18.50%, net present ratio of 1.29, compared with 1.19 for the same period last year; 2) Net cash flow from investment activities -3.418 billion yuan, compared to -3.063 billion yuan in the same period last year, of which 3.417 billion yuan was paid in cash for the purchase and construction of fixed intangible other assets, +17.72% YoY; 3) Net cash flow from financing activities was 1.866 billion yuan, +57.31% YoY.

Master Chengdu's high-quality water solid waste assets, increase production capacity and increase sewage prices, and there is plenty of room for long-term cash flow growth. 1) Profit: ① Production capacity: Chengdu water solid waste production capacity expansion+two and three layer integration+offsite expansion led to capacity accumulation. As of 2024H1, the scale of water supply, sewage, reclaimed water, and waste incineration power generation projects operated and under construction by the company was 430, 4.8, 1.1, 0.012 million tons/day, respectively, of which tap water production capacity is 0.4 million tons/day (Chengdu Plant 7 Phase III), sewage production capacity under construction is about 0.5 million tons/day (Fenghuanghe Ergou Reclaimed Water Plant, Waiyan Regeneration Plant) Urban Fifth, Sixth, and Eighth Reclaimed Water (Plant Phase II, etc.), the Wanxing Phase III project, etc. will be put into operation within the next 1-2 years to contribute to incremental performance; ② Price increase: The provisional average sewage treatment service fee for Phase V (2024-2026) of Chengdu Central City (2024-2026) is 2.63 yuan/ton, an increase of 0.48 yuan/ton over 2023, an increase of 22%, bringing profit flexibility. 2) Cash flow: After the peak of capital expenditure in the next 2 years, there is plenty of room for long-term free cash flow to increase. The company's dividend ratio in 2023 is 27.53% (+6.86pct), leaving plenty of room for improvement.

Profit forecast and investment rating: The company has control over Chengdu's high-quality water solid waste assets. The projects under construction focus on ensuring high-quality growth in the Chengdu region, and have great potential to increase long-term free cash flow and dividends. We maintain our 2024-2026 net profit forecast of 2.079/2.28/2.489 billion yuan, corresponding PE of 11/10/9 times, and maintain a “buy” rating.

Risk warning: Project construction progress falls short of expectations, extended accounts receivable period, rising capital expenditure, etc.