XREC(000598) Xinda Securities·2024-02-20 16:00Investment Rating - The report assigns a "Buy" rating to the company [3]. Core Views - The company, backed by the Chengdu State-owned Assets Supervision and Administration Commission, is a leading water service provider with strong profitability [2][10]. - The company has a self-sufficient water supply capacity of 3.343 million tons per day and a sewage treatment capacity of 3.86 million tons per day, holding a 100% market share in the main urban area of Chengdu [2][5]. - The company has demonstrated strong financial performance, with a net profit compound annual growth rate (CAGR) of 10% from 2015 to 2022 and a net profit margin of 26.81% in Q3 2023, ranking first in the industry [2][24]. Summary by Sections Company Overview - The company is a major water and environmental service provider in China, with a focus on water supply and sewage treatment services, and is a core subsidiary of Chengdu Environment Investment Group [10][13]. - The company has over 70 years of experience in the water supply industry and has expanded its operations to include waste treatment and environmental services [13][15]. Water Business Contribution - The water supply business benefits from excellent cost control, with a gross margin of 44.28%, which is higher than comparable companies in the industry [5][27]. - The company is expected to see stable growth in water sales volume due to the rapid population growth and economic development in Chengdu, with a projected increase in water supply capacity from ongoing projects [27][31]. Sewage Treatment Business - The sewage treatment business is anticipated to enter a new pricing cycle in 2024, with a projected increase in sewage treatment capacity to 4.4 million tons per day and a potential price increase of 15% [2][5]. - The company is actively pursuing high-quality sewage treatment projects outside Chengdu, which may further enhance its capacity and profitability [2][5]. Dividend Capability and Intent - The company has maintained a dividend payout ratio of around 20% from 2018 to 2022, which is relatively low compared to peers, primarily due to high capital expenditure for new capacity [2][5]. - With a decrease in capital expenditure and an increase in free cash flow, the company's ability and willingness to pay dividends are expected to improve [2][5].