Incident: The company released its 2023 performance report. In 2023, the company achieved total operating revenue of 576 million yuan, a year-on-year decrease of 27.03%; net profit attributable to mother/ net profit deducted from non-mother was 1.01/94 billion yuan, respectively, a decrease of 11.97%/12.15% year-on-year.

The decline in performance in 2023 was mainly due to a slowdown in new orders and an extension of the repayment cycle. Unfavorable factors improved starting in the fourth quarter. The company's annual performance declined. The decline in revenue was mainly due to various factors such as the market environment and government financial pressure. Project construction and bidding progress were slow, and new orders did not meet expectations; the decline in net profit was also related to the tight capital chain of some downstream customers and extended repayment cycles, leading to an increase in bad debt reserves for accounts receivable. On a quarterly basis, in the fourth quarter of 2023, the company achieved operating income of 225 million yuan, a year-on-year decrease of 24.50%, and a month-on-month increase of 349.12%; realized net profit of 78 million yuan, an increase of 74.03% over the previous year, and the performance ushered in a major recovery. We think it may be related to the confirmation of supplementary contracts for the Laogang project. At the same time, the fourth quarter is generally a peak repayment season for traditional engineering projects, and some bad debt preparations may be reversed to increase profits.

The additional contract amount for the Laogang project is 142.5 million yuan, which is expected to have a positive impact on the company's 2023 performance. On January 19, 2024, the company issued the “Notice on Supplementary Agreements for Major Contracts”. Since the buyer added entrustment content such as impurity mixing treatment and other related units during the implementation of the Laogang temporary sludge treatment project undertaken by the company, the total contract amount increased by 142.5 million yuan. Since the Laogang project was completed in the first quarter of 2023, the confirmation of this supplementary contract is expected to have a positive impact on the company's 2023 performance.

The active share repurchase plan implements incentives, demonstrating the company's confidence in development. On August 21, 2023, the company announced that it agreed to use part of the overfunded funds to repurchase the company's shares through centralized bidding and use all of them for employee stock ownership plans or equity incentives at an appropriate time in the future. As of January 31, 2024, the company has repurchased 2.66 million shares, accounting for 1.80% of the company's current total share capital. The company's repurchases show confidence in development, and the launch of subsequent incentive plans will be beneficial to long-term development.

Profit forecast: Maintain the company's “gain” rating. According to the company's 2023 performance report, we adjusted our profit forecast. The company is expected to achieve operating income of 576/6.19/661 million yuan in 2023-2025 (previous value was 476/5.41/619 million yuan), and net profit to mother of 1.01/120/139 million yuan (previous value was 0.54/0.99/119 million yuan), and corresponding PE is 16.20x/13.53x/11.75x, respectively.

Risk warning: Changes in the macroeconomic situation at home and abroad have exceeded expectations, technology and product competitiveness have fallen short of expectations, order acquisition and business expansion have fallen short of expectations, profit forecasting and valuation models have fallen short of expectations