Maintain BUY rating with target price of RMB6.63

According to its announcement released on 14 December, WELLE Environmental (WELLE) has won the landfill leachate treatment bids of Changchun Municipal Solid Waste Treatment Center and Daxin landfill project in Shenyang. Specializing in organic waste recycling and industrial energy conservation, the company has accumulated extensive expertise in projects, technological advancements and customer resources. We maintain 2023E/2024E/2025E EPS at RMB0.07/0.17/0.30. Given the company’s leading technology, successful operational track record, and our optimism regarding heightened acquisition and execution of engineering orders, as well as its great earnings upside potential, we value the stock at 39.0x 2024E PE, a premium over its peers’ Wind consensus-based average of 26.0x. Our target price is RMB6.63 (previous: RMB5.10). Maintain BUY.

Specializing in landfill leachate treatment, major orders secured

The leachate treatment project of Changchun Municipal Solid Waste Treatment Center, which WELLE estimated to worth RMB171mn, involves WELLE providing leachate treatment facilities with a capacity of no less than 1,000 tonnes/day (peak treatment capacity: 1,500 tonnes/day). Furthermore, WELLE will handle the installation, commissioning, operation and post-service facility dismantling. The contract will span three years and be renewed annually, at a bid-winning price of RMB155.98/tonne. Additionally, the concession project for the temporary leachate treatment facilities at the Daxin landfill site, which WELLE value at RMB292mn, tasks WELLE with constructing temporary leachate treatment facilities (capacity: 1,400-tonne/day), with a contract fulfilment period of 4.5 years and bid-winning price of RMB126.98/tonne.

Equity transfer to optimizing asset structure and boost cash flow

According to the announcements of WELLE and Xingrong Environment (Xingrong) released on 18 November, WELLE proposes to transfer 100% stake in WELLE Xi'an to Xingrong, at a price of RMB283mn. WELLE Xi'an is a kitchen-waste concession project. The Phase I project involves kitchen-waste/waste grease treatment capacity of 200/20 tonnes per day, with a concession period of 30 years (2016-2046). The Phase II project involves kitchen-waste treatment capacity of 200 tonnes/day and a concession period of 26 years (2020-2046). With stable operations, WELLE Xi'an posted revenue/net profit of RMB56.75/9.95mn in 10M23, and had net assets of RMB178mn as of 31 October, corresponding to 1.6x PB for the equity transfer. As of 30 September, WELLE holds monetary funds amounting to RMB546mn. We anticipate this equity transfer to optimize its asset structure and boost cash flow.

Risks: slower execution of engineering projects than we expect; slower ramp-up of leachate and kitchen-waste treatment orders than we expect.