1H21's performance is in line with our expectations.

The company announced 1H21 results: revenue of 3.178 billion yuan, an increase of 22.5% over the same period last year; net profit of 1.055 billion yuan, an increase of 35.7% over the same period last year, corresponding to 0.22 yuan per share; and net profit of 774 million yuan, an increase of 8.0% over the same period last year, in line with our and market expectations. We believe that the growth in performance is mainly due to the stable increase in production capacity and price adjustment, and the growth rate of corporate income is higher than that of deducting non-return net profit, which is mainly due to the reduction of value-added tax rate on sewage treatment services in May 2020 and the decline in non-taxable income in 2021. The growth rate of net profit is higher than that of deducting non-return net profit, which is mainly due to the impact of profit and loss on the disposal of non-current assets.

The rise in volume and price led to performance growth: 1) the sales volume of the water supply sector increased by 15.72% to 296 million cubic meters compared with the same period last year, and the average water price reached 2.90 yuan per cubic meter, jointly promoting the revenue of the water supply sector to increase by 16.439 to 807 million yuan over the same period last year; 2) the average water price of the sewage treatment plate reached 2.98 yuan per cubic meter, driving the sector's revenue to increase by 25.21% to 1.836 billion yuan compared with the same period last year.

Profitability is steadily rising: 1H21's composite gross margin rose 2.51ppt to 43.98 per cent year-on-year.

The main reason is that the increase in water price drives the gross profit margin of the water supply sector to 29.36% and that of the sewage treatment sector by 1.86ppt to 48.86%. During the period of the company, the expense rate was basically stable at 14.7% and well controlled, of which the sales expense rate increased by 0.1ppt to 1.8% compared with the same period last year, the management expense rate increased by 1.7ppt to 12.9% over the same period last year, and the operating cash flow was still robust.

Development trend

The steady increase in production capacity and the advantage of superimposed channels promote the company's performance to continue to improve. As of 1H21, the company's tap water supply and sewage treatment capacity has increased by 12% to 273.75 / 4.2408 million cubic meters, respectively, compared with the end of 2020, and the sludge treatment capacity has reached 1992 tons / old. We believe that the increase in the company's production capacity can support business expansion and boost performance growth. The company enjoys the franchise of Chongqing water supply and drainage business, and we believe that the channel advantage will help the company to build an integrated water supply and drainage enterprise with integrated plant and network and complete industrial chain. In response to the requirements of the 14th five-year Plan for pollution prevention and control, we will speed up the improvement of the quality and efficiency of traditional business and the multi-dimensional layout of emerging business. The company continued to promote standard raising and transformation, adding 12 sewage treatment plants to Class A during the reporting period. In terms of new business, the company actively expanded the market layout of external water supply and drainage, sludge disposal and water environment treatment. We believe that driven by policy support, capacity improvement and business improvement, the company is expected to become a leading water enterprise based in Chongqing and oriented to regionalization.

Profit forecast and valuation

The net profit in 2021 / 2022 remains unchanged at 18.8 / 1.98 billion yuan, and the current stock price corresponds to 13.8 times / 13.0 times earnings in 2021 / 2022. Maintain an outperform industry rating and a target price of 6.50 yuan, corresponding to a price-to-earnings ratio of 16.6 times earnings in 2021 / 2022, which is 20.8% higher than the current stock price.

Risk

The downside risk of sewage disposal fee; the project advance is not as expected; the risk of interest rate fluctuation.