Green Dynamics released its three-quarter report: Q3 achieved revenue of 0.883 billion yuan (yoy -1.90%, qoq +3.25%) and net profit of 0.201 billion yuan (yoy +16.75%, qoq +22.19%), exceeding our expectations (0.16-0.18 billion yuan), mainly due to increased waste entering the factory and feed-in electricity. Q1-Q3 2024 achieved revenue of 2.544 billion yuan (yoy -16.37%), net profit of 0.504 billion yuan (yoy -6.02%), deducted non-net profit of 0.5 billion yuan (yoy -5.11%). The decline in revenue was mainly due to a decrease in ongoing projects and a sharp year-on-year decline in construction revenue. The company's waste incineration projects have all been put into operation, and cash flow and dividend levels are expected to continue to rise. The “buy” rating for Green Dynamics A/H shares has been reaffirmed.

9M24 free cash flow reached 0.763 billion yuan

The decline in the company's revenue and profit in the first three quarters was mainly due to a sharp drop in non-cash construction revenue. Operating revenue grew steadily, and profit quality and cash flow further improved. Net operating cash flow for the first three quarters was 1.055 billion yuan, +60.04% year over year, capital expenditure 0.292 billion yuan, year-on-year, -51.92% year-on-year, and free cash flow of 0.763 billion yuan (9M 23:0.051 billion yuan), which achieved leapfrog year-on-year growth. Judging from the free cash flow trend, the company's free cash flow in 2023 was 0.256 billion yuan, which was corrected for the first time in history. 9M24 free cash flow has reached 3 times the level for the full year of 2023. Under the debt conversion policy and user payment trend, the company's cash flow is expected to grow further in the future, creating a solid foundation for increasing dividends and returns to shareholders.

The amount of garbage disposal and feed-in electricity continued to grow. The gas supply volume was +23.64%, and the amount of garbage entering the factory in the first three quarters was 10.7075 million tons, up 7.16% year on year; the cumulative power generation capacity was 3.822 billion degrees, up 10.44% year on year; the cumulative feed-in electricity volume was 3.16 billion degrees, up 10.94% year on year, and the cumulative gas supply was 0.3719 million tons, up 23.64% year on year, and the feed-in price was 0.391-0.65 yuan/kilowatt hour. The amount of waste entering the factory and the amount of feed-in electricity has been steadily increasing, while actively expanding the steam supply business. The waste incineration business is expected to contribute to continuous and stable profits and cash inflows.

The target price for A/H shares is $7.61/HK$4.14. They all reaffirm that the “buy” rating will reduce construction revenue and raise the credit impairment forecast based on ongoing construction and repayment conditions. We expect net profit to the mother for 2024-2026 to be 0.612/0.653/0.696 billion (previous value: 0.644/0.705/0.76 billion yuan). For Green Power A shares (601,330 CH), considering the high increase in the company's free cash flow, we gave 16.2 times the predicted PE for 2025, and the corresponding target price was RMB 7.61 (previous value: RMB 7.36), reaffirming the “purchase”. For Green Power H shares (1330 HK), due to the low liquidity of the stock in the Hong Kong stock market, we gave 8.1 times the predicted PE for 2025, with a corresponding target price of 4.14 HKD (previous value: HK$4.04), reaffirming the “purchase”.

Risk warning: Waste disposal volume and feed-in electricity are lower than expected, gross margin of solid waste treatment is lower than expected, construction revenue decline exceeds expectations, and impairment of accounts receivable exceeds expectations.