2024H1 profits continue to grow. The company released its 2024 semi-annual report. In the first half of the year, revenue was 5.82 billion yuan, yoy -1.7%, and net profit to mother was 0.89 billion yuan, yoy +28.6%. The main reasons for the year-on-year increase in the company's net profit and year-on-year decline in operating income are: (1) the decline in revenue from the solid waste engineering business; (2) the Jining project confirmed that electricity bill revenue from November 2020 to June 2024 affected net profit by about 0.12 billion yuan; (3) the import and sales price spread of the natural gas business improved, achieving net profit of about 0.12 billion yuan, an increase of about 0.06 billion yuan over the same period last year; (4) the company continues to implement cost reduction and efficiency measures Good results have been achieved.

Profitability has improved markedly, cost management is reasonable, and net operating cash flow is steady. 2024H1, the company achieved a comprehensive gross profit margin of 31.2% (yoy+5.3pct), mainly due to the increase in operating repayments for the solid waste business and drainage business in the current period. The total three-fee ratio is 10.8% (yoy+0.5pct), where the sales expense rate/management expense rate/financial expense ratio are 1.0%/5.5%/4.3%, yoy+0.02pct/+0.6pct/-0.06pct, respectively. Net cash flow from operating activities was 0.94 billion yuan, yoy +249.7%. Excluding the impact of explanation No. 14, the net cash flow from operating activities was 0.96 billion yuan, yoy +137.7%. The company and local governments promoted the improvement and implementation of fee disbursement mechanisms, accelerated repayment, and promoted the gradual improvement of charging mechanisms such as garbage disposal fees, etc., and all tasks progressed in an orderly manner.

The company takes solid waste business as the core, and multiple sectors develop collaboratively. By business, the 2024H1 solid waste treatment business achieved revenue of 3.05 billion yuan (yoy -1.7%) and net profit of 0.58 billion yuan (yoy +12.9%), mainly due to confirmation of subsidies, increased capacity utilization in some projects, increased business development, and agricultural project expansion strategies achieved remarkable results; the energy business achieved revenue of 1.85 billion yuan (yoy -4.3%) and achieved net profit of 0.12 billion yuan, an increase of about 0.06 billion yuan over the same period last year Yuan, mainly due to the improvement of the price spread of natural gas; the water supply business achieved revenue of 0.45 billion yuan (yoy +1.6%); the company's water supply service reached the leading domestic level, promoted the implementation of direct drinking water projects in various scenarios, and actively expanded the water supply light asset business; the drainage business achieved revenue of 0.33 billion yuan (yoy +9.4%), mainly confirming the operating revenue of the Danzao Jinsha Plant expansion project since July 2022.

Continuing to advance the “big solid waste” strategy, Yuefeng Privatization plans to enhance operational capacity. The company places equal emphasis on horizontal expansion and vertical expansion in the field of solid waste treatment, and collaborative business development promotes cost reduction and efficiency: 1) 2024H1 achieved 0.666 million tons of external heating, yoy +36.2%. 2) The kitchen waste hydrogen production project was completed and put into operation in the second half of 2023. 2024H1 achieved external sales of 0.387 million kg of hydrogen, yoy +293.0%. 3) The scale of the overseas project (Bangkok, Thailand) is 3,300 tons/day. The agricultural reclamation phase II project (1,400 tons/day) and the Anu project (1,400 tons/day) started in February 2024, and are progressing smoothly. 4) The production capacity of waste incineration power generation is abundant. The total scale of orders for domestic waste incineration power generation is 0.036 million tons/day (excluding shareholding projects). Of these, the scale of the projects already put into operation is 0.03 million tons/day, and the capacity utilization rate exceeds 120%, an increase of about 4 percentage points over the previous year. The company plans to acquire Yuefeng Environmental Protection through its subsidiary Hanlan Hong Kong. If the merger is successful, the total scale of the project will reach 0.09 million tons/day.

Investment advice: The company has formed a complete ecological and environmental service industry chain. The sector has strong resource sharing and synergy effects, and is developing steadily. Since the details of the merger and acquisition of Yuefeng Environmental Protection still need to be further determined, the company's net profit for 2024-2026 is estimated to be 1.74/1.83/1.93 billion yuan, corresponding to PE of 9.8/9.3/8.8X, maintaining a “buy” rating.

Risk warning: Project commissioning falls short of expectations, increased competition in the industry, risk of policy changes, etc.