CICC has released a report stating that while EB ENVIRONMENT's (00257) new project expansion is expected to slow in 2025, potentially affecting revenue performance, the optimization of existing assets is proving highly effective, driving continuous improvement in asset quality and cash flow. The firm forecasts a single-digit year-on-year profit growth for 2025, accompanied by a significant enhancement in cash flow. The bank expresses optimism regarding the company's strengthened dividend distribution capability and its commitment to rewarding shareholders, making it a key recommendation. An Outperform rating and a target price of HK$5.2 are maintained, corresponding to 2025/26 price-to-earnings ratios of 7.8x and 7.2x, respectively, suggesting approximately 7% upside from the current share price. CICC's primary views are outlined below.
Core business metrics continue to show improvement, although one-off factors may still cause fluctuations in 2025's profit performance. As the proportion of construction activities declines and the focus shifts to optimizing existing assets, the bank believes the company's core profit is steadily increasing, with key indicators such as electricity generation per ton and heating supply showing consistent improvement. However, considering ongoing operational pressures in the hazardous waste segment, which still carries impairment risks, and increased exchange losses due to the sustained strength of the Renminbi throughout 2025 (appreciating 4.2% for the year, breaking through 7 by year-end, resulting in a H1 2025 loss of -428 million yuan), the bank anticipates the company's 2025 earnings growth will remain in the single-digit range.
Capital expenditure is declining, coupled with an acceleration in the recovery of renewable energy subsidies, leading to a positive outlook on the company's funding adequacy and dividend potential. The domestic solid waste industry has entered a saturated and mature phase, prompting the company to significantly slow its pace of new project expansion and adopt a cautious investment approach, with capital expenditure primarily directed towards overseas and water-related projects. The bank expects 2025 capital expenditure to be potentially controlled below 3 billion yuan. Concurrently, the disbursement of renewable energy subsidies accelerated in the second half of 2025, with smooth recoveries of national subsidies related to waste-to-energy and biomass projects enhancing the company's cash inflows. The bank is optimistic about the company's free cash flow turning positive, its cash capabilities continuing to improve, and consequently, an increase in dividend levels to reward shareholders.
Earnings Forecasts and Valuation. Accounting for expected impairments in the hazardous waste business and exchange losses stemming from a stronger US dollar, the bank has lowered its 2025/26 profit forecasts for the company by 16.2% and 7.5% to 3.58 billion yuan and 4.08 billion yuan, respectively, while introducing a 2027 profit forecast of 4.46 billion yuan. The current share price corresponds to 2026/27 P/E ratios of 7.3x and 6.7x. Nevertheless, the bank expects the company's adjusted dividend yields for 2026/27 to still reach 6.0% and 6.6%, characterizing it as having stable earnings, strong cash flow, and high dividend distribution.
Risk Warning: Overseas business performance may fall short of expectations, and collections from waste treatment fees could be lower than anticipated.
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