Key investment points:

Backed by Guangzhou's state-owned capital, it has a regional advantage: The actual controller of Yongxing Co., Ltd. is the Guangzhou Municipal Government, which is the sole investor and operator of the Guangzhou Waste Incineration Power Generation Project. The company has 14 waste incineration power generation projects in operation, with a total production capacity of 32090 tons/day and 4 biomass treatment projects, with a total production capacity of 2,590 tons/day. Most of them are located in advantageous regions of Guangzhou. The company's projects have basically been put into operation, the business structure is stable, operating income dominates, and cash flow is good.

Empowering technology and improving capacity utilization drive performance growth: The company focuses on R&D. The company independently innovates and develops various incinerator types with a daily processing capacity of 250 tons to 900 tons, and has also developed an ACC automatic incineration control system to meet the efficient combustion requirements of garbage with different calorific values. The automatic input rate reaches more than 95%, saving manpower and material consumption, achieving refined operation, and laying the foundation for cost reduction and efficiency. With the support of endogenous growth in primary waste and the increase in the contribution of old landfill waste, we expect the company's waste incineration treatment capacity to reach 10.69 million tons in 2026, corresponding capacity utilization rate of about 91%. If industrial solid waste mixing is considered, the company's overall waste incineration capacity utilization rate is expected to increase further, and the economic efficiency will improve markedly. Guangzhou's industrial development has a solid foundation. The company can fully tap the downstream steam market demand, carry out heating services, and broaden profit margins.

Project operation continues to improve, and cash flow guarantees dividend capacity: Currently, waste incineration treatment capacity has met China's demand for harmless garbage and resource treatment, and the “14th Five-Year Plan” target has been completed ahead of schedule. As the number of new winning projects decreases, the capital expenses of related enterprises are expected to drop further, and the waste incineration power generation industry has moved from an incremental stage to an inventory stage. By the end of 2023, the company's existing holding projects have basically been put into operation, and capital expenditure is expected to be drastically reduced. The company pioneered a stable high-dividend in the A-share waste incineration power generation industry, and proposed that the company's total profit distribution for a single year 2023-2025 is not less than 60% of the distributable profit achieved in that year.

Profit forecast and investment advice: As the amount of old garbage disposal increases compounded by endogenous growth in native waste, the company's capacity utilization rate is steadily increasing, and performance is expected to maintain steady growth. We forecast that the company's revenue for 24-26 will be 3.688 billion yuan, 4.165 billion yuan, and 4.572 billion yuan, respectively, and net profit to mother will be 0.803 billion yuan, 0.959 billion yuan, and 1.126 billion yuan, respectively, corresponding to PE 16/14/12 times, respectively. We used PE valuation, combined with comparable company conditions, and considering that Yongxing shares have better growth potential, we gave a 20-fold valuation in 2024, corresponding to a market value of 16.1 billion yuan, and a target price of 17.85 yuan/share for the company. First coverage, giving a “buy” rating.

Risk warning: industry policy risks; local financial pressure; uncertainty about endogenous growth of native waste.