Guosen: EB ENVIRONMENT (00257) rated as "outperform" with a fair value of HKD 4.48-4.73.

Guosen has released a research report stating that it is expected that the net profit attributable to shareholders of EB ENVIRONMENT (00257) in 2024-2026 will be 3.703/3.943/4.144 billion Hong Kong dollars, with year-on-year growth of -16.4%/6.5%/5.1%; EPS will be 0.60/0.64/0.67 yuan. Through multiple angles of valuation, the company is expected to have a reasonable valuation between 4.48-4.73 Hong Kong dollars, with an initial coverage rating of "outperforming the market". Guosen's main points are as follows: The world's largest waste incineration investment operator. EB ENVIRONMENT, formerly known as Guosen International, was established in 1993 and successfully listed on the Hong Kong Stock Exchange four years later. In 2003, it began to enter the environmental protection industry and is one of the few listed companies of central enterprises in the industry. After more than twenty years of development, the company has grown into the world's largest waste incineration power generation investment operator, with a total of 191 waste-to-energy projects implemented (including commissioned operation projects), designed to process 158,900 tons of household waste per day, ranking first in the industry. Analysis of the stock price suppression factors of EB ENVIRONMENT. 1) Complex accounting treatment. The accounting standards for BOT in Hong Kong are complex, and the company's disclosed operating income/construction income/financial income can easily be misunderstood based solely on their literal meaning, making it relatively difficult to read financial reports. 2) Diversification of business suppresses valuation. After years of development, the company has gradually expanded from its early waste incineration business to various areas such as kitchen waste, sludge, water treatment, biomass power generation, hazardous waste, and photovoltaics, while also holding controlling stakes in two listed companies in Hong Kong (Guosen Water & Guosen Green), making it difficult to value the company as a pure waste-to-energy company. 3) Historical massive investments & accounts receivable affect cash flow. The capital requirements for business expansion are immense, leading to continued external financing hindering cash flow performance, and high asset-liability ratio and high financial expense ratio also suppress performance. Meanwhile, in the context of the industry facing subsidy reductions from the central government and significant financial pressures from local governments, the company's electricity subsidies, waste disposal fees, and sewage treatment fees are to some extent unpaid. Why should Guosen continue to be optimistic about EB ENVIRONMENT at this particular time? 1) Capital expenditure is decreasing, and free cash flow turned positive in 24H1: As a leading company in the industry, with the growth of the waste incineration industry coming to an end, the company's capital expenditure continues to significantly decrease, while the operation of more projects brings in ample operating cash flow. In 2024H1, the company's operating cash flow minus capital expenditure was approximately 1.03 billion Hong Kong dollars, turning positive. 2) The proportion of operating profit continues to rise: Similarly, with capital expenditure decreasing, the proportion of construction income is decreasing, and the proportion of operating income is increasing. Referring to the valuation of waste incineration companies in the Hong Kong secondary market, operating profit has a higher valuation level. Based on the 2025 valuation level, considering only the operating profit, EB ENVIRONMENT's current PE is only around 6 times, relatively undervalued compared to peers in the industry. 3) High dividend yield, improved dividend capability: The current dividend yield of the company is around 5.58% (as of the closing price on December 25, 2024), ranking in the top tier of the waste incineration industry. After the turning point of free cash flow, the company's dividend capability is expected to improve. Risk warning: The main business growth cannot cover the decline in construction profit; Accounts receivable recovery is below expectations, dividend increase is below expectations.