XREC(000598) 申万宏源·2024-11-01 01:13Investment Rating - The report initiates coverage on the company with a "Buy" rating, citing a 20% upside potential based on a 13x PE multiple for 2024, targeting a market cap of 26.4 billion yuan [4][10] Core Investment Thesis - The company is a leading integrated water and environmental services provider under the Chengdu State-owned Assets Supervision and Administration Commission (SASAC), with a strong presence in water and solid waste sectors [4] - Historical performance shows steady growth, with revenue and net profit CAGR of 14% from 2019-2023, and a significant improvement in cash flow, leading to a higher dividend payout ratio of 28% in 2023 [5] - The company has a robust pipeline of projects in water treatment, water supply, and environmental services, with significant expansion potential in both Chengdu and other regions [5][6][7] Water Treatment Business - The company operates 4.34 million tons/day of water treatment capacity, with an additional 460,000 tons/day under construction, representing a 10.6% expansion ratio [5] - Chengdu accounts for 72% of the operational capacity, with a guaranteed return on investment of 10% every three years, and a recent price increase of 0.5 yuan/ton in 2024 is expected to boost net profit by 200 million yuan [5] - The company is expanding its footprint beyond Chengdu, with 28% of its water treatment capacity located in other regions such as Lanzhou, Xi'an, and Shenzhen [38] Water Supply Business - The company operates 3.89 million tons/day of water supply capacity, with an additional 410,000 tons/day under construction, representing a 10.5% expansion ratio [6] - Chengdu accounts for 82.4% of the operational capacity, with stable water prices since 2014, but potential for future adjustments [6] - The company has a strong track record in water supply, with historical gross margins maintained between 45-50% [6] Environmental Services - The company has a significant presence in waste-to-energy, with 6,900 tons/day of operational capacity and 5,100 tons/day under construction, expected to be completed by the end of 2025 [7] - The company also operates in leachate treatment (5,630 tons/day), sludge treatment (1,516 tons/day), and food waste treatment (500 tons/day), with substantial expansion plans in these areas [7] - The environmental services segment is expected to contribute significantly to future growth, with waste-to-energy capacity set to double by 2025 [7] Financial Projections - The company is expected to achieve net profits of 2.033 billion yuan, 2.216 billion yuan, and 2.407 billion yuan for 2024-2026, with PE ratios of 11x, 10x, and 9x, respectively [8] - Revenue is projected to grow at a CAGR of 7.6% from 2024-2026, driven by expansions in water treatment, water supply, and environmental services [9] - The company's free cash flow is expected to turn positive as capital expenditure peaks pass, providing room for further dividend increases [5][8]