GEOENVIRON(603588)：RECOVERY OF OPERATIONS BUSINESS SUCCESSFUL LAUNCH OF KEY PROJECTS

　　In 1H23, Geoenviron's performance fell short of expectations, primarily due to intense competition in the upstream market and rising raw material procurement costs. However, the successful commissioning and capacity release of key projects like Jiangxi Xinke drove a 38.4% increase in revenue from the solid waste treatment operations segment. Additionally, the waste incineration power generation business showed stable growth. As the Company actively adjusts its management and strategies, coupled with the performance contribution from the Jiangxi Xinke project, we believe the Company's performance for 2H23 is promising. With ample growth prospects ahead, we maintain our "BUY" rating on the Company with a TP of Rmb12.
　　1H23 performance below expectations.
　　In 1H23, the Company posted revenue of Rmb4.47bn (+11.8% YoY), attributable net profit (ANP) of Rmb0.49bn (+11.2% YoY). In 2Q23, the revenue was Rmb2.73bn (+12.4% YoY), and ANP was Rmb0.29bn (+5.0% YoY). The Company's performance in 1H23 fell short of expectations, mainly due to fierce competition in the upstream market and rising costs of raw material procurement.
　　Solid waste management sees significant growth in scale; operating free cash flow is under pressure.
　　Geoenviron’s solid waste management operations achieved revenue of Rmb3.26bn in 1H23 (+38.4% YoY), driven by continuous capacity expansion in hazardous waste recycling, stable operation of harmless treatment and waste incineration projects, resulting in respective revenue growth of 48.4%/8.8%/15.9% in these segments. The solid waste management engineering segment achieved revenue of Rmb0.59bn (-40.5% YoY), due to completion and operation of numerous waste incineration projects and decrease in project volume. The environmental restoration segment recorded revenue of Rmb0.46bn (+0.83% YoY), which was basically stable. In 1H23, the comprehensive gross profit margin (GPM) decreased by 1.35ppts to 21.9%, primarily due to impact of a contracting raw material market and intense market competition. Some projects have yet to reach their expected profit levels, causing the GPM of the solid waste management operation business to decrease by 2.36ppts to 18.8%. In 1H23, the Company's selling/administrative /financial expense ratios changed by +0.3/+0.1/-0.1ppts respectively, reflecting effective expense control. In 1H23, The Company posted operating free cash flow of Rmb-1.36bn (-328% YoY), due to payment of Rmb1.93bn for raw material procurement to secure smooth production and operation of the Jiangxi Xinke project after its commissioning.
　　Jiangxi Xinke's smooth production commissioning may contribute growth momentum in 2H23; proactive strategy adjustments in response to adverse factors.
　　In 1H23, in the realm of solid and hazardous waste resource utilization, the Company's operational capacity for recycling metal/non-metal waste has reached 1,026kt/455kt per year. The newly commissioned Jiangxi Xinke　　project contributed an additional capacity of 310kt in hazardous metal waste recycling in 1H23. The Jiangxi Xinke project's copper, gold, and silver product lines were fully connected in Jun, setting the stage for significant performance enhancement in the 2H23. In waste incineration and power generation, the Company's operational capacity is 11kt/day, and with steady operation the segment achieved revenue of Rmb593mn in 1H23 (+15.9% YoY). The ongoing projects, Hai La Er and Yueyang Phase II, are expected to collectively add capacity of 1.4kt/day upon completion, indicating a positive outlook. Due to economic conditions, new project contracts for 1H23 amounted to Rmb1.88bn (-9.1% YoY). We believe that with the successful commissioning of key projects and Geoenviron's strategic adjustments based on market and operational conditions, the Company is better equipped to navigate challenges such as rising procurement costs and intense market competition and achieve revenue growth and performance recovery.
　　Potential risks:
　　Construction projects behind schedule; intensified competition in hazardous waste industry; adjustments in incineration power generation subsidies.
　　Investment recommendation:
　　Considering sustained high raw material prices and the need for some projects to fully realize their profit potential over time, we have revised down our 2023E/24E/25E EPS estimates at Rmb0.61/0.79/1.01 (previously Rmb0.64/0.85/1.10), implying 15x/12x/9x PE at the current stock price. By using the Company's historical average PE over the past three years minus one standard deviation as target PE, we assign 20x 2023E PE to derive a target price of Rmb12 for Geoenviron and maintain our "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。