Key points of investment
Incident: In 2023, the company achieved revenue of 12.541 billion yuan, a decrease of 2.59%; net profit to mother was 1,430 billion yuan, an increase of 25.23%; net profit after deducting non-return to mother was 1,407 billion yuan, an increase of 27.07%.
The core profit of solid waste operations has grown steadily, and we are actively exploring heating and international exploration. In 2023, the company's solid waste business achieved revenue of 6.433 billion yuan, and realized net profit of 986 million yuan, an increase of 9.34%. Among them, ① engineering and equipment business revenue was 1,173 billion yuan, a decrease of 51.74%, and a net profit of 73 million yuan, a decrease of 59.76%. ② After excluding engineering and equipment, the solid waste business revenue was 5.481 billion yuan, an increase of 17.40% over the same period. Among them, waste incineration operating revenue was 3.268 billion yuan, an increase of 15.57%, mainly due to the commissioning of new projects and the expansion of stock projects. Net profit was 766 million yuan, an increase of 11%, and gross margin of 44.70%, a decrease of 3 pcts. In 2023, the company's waste incineration power generation capacity utilization rate was 119 percent, tons of power generation capacity was 367 kilowatts (-4% year over year), and 315 kilowatts of feed-in electricity (-3% year over year), mainly due to active development of heating. External heating was 1,101 million tons in 2023, an increase of 35%.
As of April 11, 2023, the company has produced 35,750 tons/day of waste incineration power generation (excluding shares), of which 29,800 tons/day has been put into operation, 1,450 tons/day under construction, 750 tons/day, and 3,750 tons/day of unbuilt projects. The company transferred 40% of Xinyuan Energy's shares and began international exploration. Xinyuan Energy has a waste incineration power generation scale of 4,500 tons/day, of which the overseas project (Bangkok, Thailand) has a scale of 3,300 tons/day. Construction of the second phase of the agricultural reclamation project in Bangkok, Thailand (1,400 tons/day) and the Anu project (1,400 tons/day) began in February 2024.
Energy performance has been restored, and profits are expected to remain normal in the future. In 2023, the energy business revenue was 4.61 billion yuan, down 0.20%, and net profit was 157 million yuan, up 222 million yuan. It was mainly due to declining gas costs, while actively seeking favorable prices, promoting diversification of gas sources, expanding projects, and ensuring stable profits. In addition, the company's hydrogen production from food waste has been put into operation, with a production capacity of about 2,200 tons of hydrogen gas/year.
The commissioning of new projects and asset-light operations led to a high increase in drainage revenue. Revenue from the drainage business in 2023 was 720 million yuan, up 20.03% from the same period, mainly due to the commissioning of 22H2 sewage plants and the promotion of asset-light operations. In 2023, it will be completed and put into operation at 85,000 m3/day, and another 50,000 m2/day is expected to be put into operation at 24H1.
The government supports addressing the decline in receivables and capital expenditure, and free cash flow will continue to increase. Excluding the impact of Document No. 14, the company's net operating cash flow in 2023 was 2,738 billion yuan, an increase of 1,543 billion yuan over the previous year, capital expenditure was about 2.3 billion yuan, a year-on-year decrease of about 900 million yuan, and free cash flow was positive. In 2023, the company received 988 million yuan in debt transfers from China Southern Holdings Group. With the support of the relevant government, the company expects to settle at least 2 billion yuan of stock accounts receivable payments in 2024. The capital expenditure for new projects in 2024 is about 1.38 billion yuan, and free cash flow is expected to increase further.
Actively increase the dividend ratio and plan to pay 10% + dividends per share over the next three years. The company's dividend ratio in 2023 was 27.38%, up 11.73 pcts year-on-year. The company issued a draft shareholder dividend return plan (2024-2026), and the cash dividend distributed per share increased by no less than 10% over the same period last year.
Profit prediction and investment rating: With its excellent horizontal expansion and integration capabilities, the company continues to expand and increase its profit scale in the solid waste sector, and is expected to remain stable after the improvement in gas sales prices. As capital expenditure falls and payables accelerate, free cash flow will continue to increase guaranteed dividends. Considering the preferential period of income tax in depreciation, we lowered our 2024-2025 net profit forecast from RMB 16.83/1.807 billion to RMB 15.71/17.14 billion. We expect net profit to mother of RMB 1,862 billion in 2026, corresponding to PE of 9/8/8 times for 2024-2026, maintaining a “buy” rating.
Risk warning: Policy promotion projects are progressing less than expected, industry competition is intensifying, and policy risks are at risk.