Xingrong Environmental released a three-quarter report: Q3 achieved revenue of 2.205 billion yuan (yoy -0.29%, qoq +1.97%). The slight year-on-year decline was mainly due to 23Q3 confirming one-time revenue and a high base. Net profit of 0.698 billion yuan (yoy +8.57%, qoq +48.14%) was in line with Huatai's expectations (0.65-0.7 billion yuan). In 2024, Q1-Q3 achieved revenue of 6.213 billion yuan (yoy +9.17%), net profit to mother of 1.626 billion yuan (yoy +9.14%), deducting non-net profit of 1.603 billion yuan (yoy +9.45%). Considering the increase in production capacity and sewage treatment costs, we expect the company's revenue and profit to continue to grow in 2024-2026. Maintain an “Overweight” rating.

Gross margin +1.58pct YoY

The company's gross profit margin in the first three quarters was 44.76%, +1.58pct year on year, mainly due to the increase in sewage prices; the cost rate level rose slightly, +0.94pct to 11.21% year on year, with sales expenses ratio of 1.50%, +0.03pct year on year, management expenses rate 5.22%, +0.08pct year on year, R&D expenses rate 0.30%, +0.19pct year on year, financial expense ratio 4.20%, up 0.64pct year on year, mainly due to increased interest costs after project consolidation; net profit margin 26.87%, yoy + 0.06pct

Fenghuang River Ergou Reclaimed Water Plant put into operation

In terms of capacity construction, in October 2024, the company's Fenghuang River Ergou Reclaimed Water Plant project was put into operation; the second phase of Shuqi Plant has a water supply capacity of 0.4 million tons, and the Wanxing Phase III waste incineration power generation project is under construction. We expect that the expansion of the company's production capacity will continue to drive performance growth.

Operating cash flow was +18.50% YoY, and the dividend payout ratio has the potential to increase 9M24's net operating cash inflow +18.50% to 2.147 billion yuan, accounts receivable +18.48% YoY to 3.258 billion yuan, and capital expenditure +17.72% YoY to 3.417 billion yuan. At the end of September, the company's balance ratio was 59.35%, which has remained stable since '22. After the project under construction is put into operation, the company's operating cash flow will increase, capital expenditure will decline, and free cash flow is expected to improve. The company's 2023 dividend payout ratio is 27.5%. We believe that the company's cash flow may improve in 2024-2026, and the dividend ratio has the potential to increase, which may fully reflect the company's potential value.

Target price 8.06 yuan

Considering the increase in the cost ratio of interest expenses, the gradual optimization of management coordination, an increase in the financial expense ratio, and a reduction in the 2026 management expense ratio forecast, we expect net profit to the mother for 2024-2026 to be 2.037, 2.37, and 2.612 billion yuan (previous values 2.111, 2.414, 2.605 billion yuan). Comparatively, the company's 2025 Wind unanimously anticipated an average PE value of 10.2 times, giving the company 10.2 times PE in 2025, corresponding to a target price of 8.06 yuan (previous value 7.31 yuan).

Risk warning: Business development falls short of expectations, project commissioning progress falls short of expectations, and repayments fall short of expectations.