Target price is 16.17 yuan, maintaining a “buy” rating

Chengfa Environmental released its annual report. In 2023, it achieved revenue of 6.522 billion yuan (yoy +2.61%), net profit to mother of 1,075 billion yuan (yoy +1.78%), and deducted non-net profit of 1,047 billion yuan (yoy +3.65%). Among them, Q4 achieved revenue of 1,713 billion yuan (yoy -19.29%, qoq +8.98%) and net profit to mother of 197 million yuan (yoy -12.44%, qoq -30.55%). The company achieved revenue of 1,357 billion yuan in 1Q24, -10.7% year-on-year, and net profit of 223 million yuan, or -27.3% year-on-year. We expect the company's net profit for 2024-2026 to be 1,172, 12.30, and 1,329 billion yuan, respectively, of which the environmental protection business/highway in 2024 was 6.45/527 million yuan. Compared with the company's 24-year Wind consensus, the average PE value is 9.5/10.4 times. Considering the uncertainty of environmental protection business development outside of Henan Province and overseas, the target price is 16.17 yuan (previous value 15.33 yuan), maintaining the “buy” rating.

Feed-in electricity volume was +15% year-on-year in 2023, and the commissioning of projects under construction with an annualized contract amount of 430 million yuan for sanitation led to an increase in the scale of solid waste operations. In '23, the company's solid waste treatment and sanitation revenue was +27.15% year-on-year to 2,665 billion yuan. The annual storage volume of household waste was 10.31 million tons, +23.52% year-on-year, and the feed-in electricity capacity was 2,443 billion kilowatts, +14.71% year-on-year. By the end of '23, the company had 32 waste-to-energy projects in hand (excluding participating companies), with a scale of 28,550 tons/day, all of which had been put into operation; 30 sanitation projects were in operation, with an annualized contract amount of about 430 million yuan.

Collaborate to lay out solid waste and water assets to build a comprehensive environmental protection investment platform. By the end of 2023, the company had 4 hazardous waste disposal projects with an annual treatment scale of 299,500 tons, including 2/2 operation/under construction projects, corresponding to an annual treatment scale of 4.85/251,000 tons; 5 ongoing medical waste disposal projects, with an annual treatment scale of 16,007 tons, all of which have been put into operation; the treatment scale of water supply projects is 305,000 tons/day, all of which have a treatment scale of 597,300 tons/day, of which 8/5 are operation/under construction, with an operating scale of 37.63 10,000 tons/day.

Expressway revenue +7% YoY in 2023, net operating cash flow -9% YoY The company's highway business revenue in '23 was +6.62% YoY to 1,439 billion yuan, of which toll revenue was +5.69% to 1,389 billion yuan. The average daily traffic volume increased by +30.33% over the same period to 44,900 vehicles, with bus traffic increasing significantly. Net operating cash flow was 1.502 billion yuan, -8.69% year on year; it is proposed to pay 0.252 yuan per share, with a dividend ratio of 15%, an increase of 5 percentage points over the previous year, and a dividend rate of 2.0%.

Risk warning: Waste incineration project operation risks, operational efficiency improvement falling short of expectations, and engineering business development falling short of expectations.