Event: The company released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 11.451 billion yuan, a year-on-year increase of 52.88%, and net profit of 0.561 billion yuan, a year-on-year decrease of 14.69%. Among them, in the third quarter, the company achieved operating income of 3.905 billion yuan, a year-on-year increase of 29.25%, and net profit to mother of 0.145 billion yuan, a year-on-year decrease of 11.23%.

The resource-based business continues to advance, so why is the company not increasing revenue and profit?

1. Resource sector: In the first half of the year, Jinchang High Energy and Jiangxi Xinke had some equipment and processes that did not fully meet expectations, resulting in insufficient effective production capacity. As a result, the growth rate of operating costs was higher than the growth rate of revenue; in the third quarter, some raw materials for production were purchased at high prices in the second quarter, which led to a decline in profits in the materials sector.

2. Engineering sector: The engineering sector was able to fulfill fewer orders, and project revenue declined. In addition, inspection projects increased in the third quarter, and depreciation of accrued contract assets increased, leading to a decline in profits in the engineering sector.

The country attaches great importance to the resource recycling industry and is optimistic about the long-term development of the company's hazardous waste recycling business. Recently, the resource recycling industry has ushered in new changes, and the favorable national policies will continue. On October 18, China Resources Recycling Group Co., Ltd. was officially established in Tianjin, with a registered capital of 10 billion yuan; on October 24, six departments including the General Administration of Customs and the Ministry of Ecology and Environment issued relevant notices stating that recycled copper and aluminum raw materials that meet the requirements of the attached schedule are not solid waste and can be freely imported. As a key link in promoting large-scale equipment renewal and consumer goods trade-in, the importance of resource recycling continues to increase.

The company has achieved a front-end and back-end integrated full-industry chain layout in the field of resource utilization of solid waste and hazardous waste. It is one of the few domestic resource utilization enterprises with front-end and back-end production capacity. With favorable policies, we are optimistic about the continued development of the company's hazardous waste recycling business.

Investment advice: Net profit of 0.89 billion yuan is predicted to be achieved in the year 25, and the net profit returned to the mother is 0.654, 0.89, and 1.056 billion yuan in 2024-2026, up 29.57%, 36.11%, and 18.65% year-on-year; diluted EPS was 0.43, 0.58, and 0.69 yuan, respectively. The corresponding PE price on October 28 was 12.42, 9.12, and 7.69 times, respectively.

In our previous review of the 22nd annual report, we lowered our profit forecast for the company's 24-25 performance at 1.36 and 1.784 billion yuan. Since the profit margin level of the company's resource sector is relatively thin, and the profit margin level for 24 years is greatly affected by sharp fluctuations in metal prices, we lowered our profit forecast for the company.

We value companies based on the PE valuation method of comparable companies. As of October 28, 2024, the average PE ratio corresponding to the 2025 performance of comparable companies Zhejiang Fu Holdings and Jintian Co., Ltd. was 13.66 times. We gave the company a 13 times PE (FY2025) valuation. The corresponding target market value was 11.6 billion yuan, and the corresponding target price was 7.53 yuan, maintaining a “buy” rating.

Risk warning: risk of sharp fluctuations in raw material prices, risk of declining capacity utilization due to insufficient receipt of materials, production progress falling short of expectations, risk of industry policy, risk of project construction safety accidents, etc.