HONGCHENG WATERWORKS(SH:600461) Xinda Securities·2024-08-01 09:01Investment Rating - The report assigns a "Buy" rating to the company, indicating a positive outlook for investment [1][2]. Core Insights - Hongcheng Environment is recognized as a leading comprehensive environmental operator in Nanchang, with stable profitability and a commitment to high dividends. The company benefits from strong support from its major shareholder, Nanchang Water Group, which holds a 29.79% stake [1][3]. - The company's water supply business demonstrates industry-leading operational capabilities, with a gross margin of 45% in 2023, while the sewage treatment business maintains a gross margin of 42%. The company's return on equity (ROE) reached 14.4% in 2023, the highest among comparable companies in the industry [1][3]. - The company has committed to maintaining a dividend payout ratio of no less than 50% of net profit attributable to shareholders from 2024 to 2026, with a static dividend yield of 4.82% in 2023 and a projected yield of 4% in 2024 [1][3]. Summary by Sections 1. Hongcheng Environment: Stable Profitability & Continuous High Dividends - The company leverages resources from its parent company, Nanchang Water Group, to establish itself as a comprehensive environmental operator, integrating water supply, gas, and solid waste management [1][8]. - The operational gross margin of the company's business segments is close to 80%, indicating robust profitability [1][12]. - The company has a strong commitment to shareholder returns, with a leading dividend capability in the industry [1][3]. 2. Water Supply Segment: Steady Operations and Expansion of Direct Drinking Water - The company holds a leading position in the Nanchang water supply market, with a gross margin of 45%. There is potential for profit enhancement due to possible water price adjustments [1][3]. - The company is actively expanding its direct drinking water business, aiming to establish 100 projects by the end of 2024, targeting a daily supply of 400 tons [1][3]. 3. Sewage Treatment Segment: Growth Potential from Water Pollution Control Reforms - As the largest sewage treatment enterprise in Jiangxi Province, the company has a market share exceeding 80%. The ongoing water pollution control reforms are expected to drive revenue growth [1][3]. - The company is advancing integrated plant and network investments, with a project investment of 3.7 billion yuan and an internal rate of return of 5%-10% [1][3]. 4. Gas Segment: Price Mechanism Implementation to Ensure Profit Stability - The gas segment, which includes gas sales and engineering, has a gross margin of 15.67%. The company holds a monopolistic position in Nanchang, with a compound annual growth rate of 9.3% in gas users from 2018 to 2023 [1][3]. 5. Solid Waste Segment: Recent Asset Injections Enhance Profitability - The company has successfully completed performance commitments for three consecutive years, with new assets expected to boost profitability. The gross margins for new photovoltaic and fly ash landfill projects are 67% and 81%, respectively [1][3]. 6. Profit Forecast and Valuation - The company is expected to generate revenues of 8.447 billion yuan, 8.905 billion yuan, and 9.419 billion yuan for 2024, 2025, and 2026, respectively, with net profits of 1.169 billion yuan, 1.235 billion yuan, and 1.289 billion yuan [1][2].