1H21 performance is lower than we expected.

The company announced 1H21 results: 1H21 revenue was 1.529 billion yuan, an increase of 3.2% over the same period last year, net profit from the parent was 87 million yuan, down 28.3% from the same period last year, and net profit from non-parent was 54 million yuan, down 45.8% from the same period last year, slightly lower than our expectation. We believe that the decline in performance is mainly due to the fact that the company's old projects are less than expected, and the expenses during the company period are higher than the same period last year.

Environmental governance business is under pressure, and the income structure has been improved. The comprehensive environmental management business was under pressure, with revenue falling 12.2% year-on-year to 1.153 billion yuan; professional and technical services business growing steadily, with revenue up 54.7% to 100 million yuan; and operating income increased significantly, with revenue up 169.8% to 274 million yuan. We believe that the company's revenue structure has improved, the proportion of operating income has increased, and the quality of earnings is expected to be further improved in the future.

The profitability is the same as the same period last year, and the structure is relatively optimized. 1H21's comprehensive gross profit margin is from + 0.58ppt to 28.1% year-on-year, of which the gross profit margin of water treatment business is from-1.44ppt to 27.2%, and the gross profit margin of soil remediation / operating income is from + 6.97/11.36ppt to 27.6%. 26.6%. Poor collection led to poor cash flow performance. The net cash flow of 1H21 operating activities was-437 million yuan, which was mainly due to a substantial increase in operating receivables; the year-on-year increase in expenses over the same period was mainly due to the increase in sales / management / financial expenses from 0.59/0.93/1.79ppt to 2.5% 0.59/0.93/1.79ppt to 2.5%, 6.0% and 7.8%, mainly due to business development and the increase in bank loans.

Development trend

State-owned assets continue to increase, enhance the company's resources and capital strength, and strengthen the layout of the company's environmental protection plate. 1H21 issued 99.15 million additional shares to its controlling shareholder Guangzhou Huantou Group, raising a total of 760 million yuan. We believe that the continuous increase of state-owned investment can enhance the strength of the company's financial resources and strengthen the ability to obtain orders. 1H21 has an order of 11.43 billion yuan on hand, an increase of 14.9% over the same period last year, and is expanding into Guangdong, Zhejiang, Jiangsu and other high-quality markets. At the same time, according to the previous reply of the company in reviewing the inquiry letter, if the new business of Guangzhou Huanchou Group and the listed company may constitute inter-industry competition in the future, then the business opportunity will first be provided to the listed company. We believe that the company relies on state-owned assets and is expected to gradually give full play to its advantages in operation, management and sales, so as to achieve a steady transformation of the business and continuous development of the market.

Profit forecast and valuation

As the company is in a period of business transition and short-term profitability is under pressure, we have reduced our net profit by 11.7% in 2021 / 2022 to 267 million yuan / 294 million yuan. The current share price corresponds to 13.8 times 2021 / 2022 / 12.5 times earnings. Based on the growing financial strength of the state-owned assets plus company, we temporarily maintain an outperform industry rating and a target price of 11.00 yuan, corresponding to 16.7 times 2021 price-to-earnings ratio and 15.1 times 2022 price-to-earnings ratio, which is 21.3% higher than the current stock price.

Risk

Order advance is not as expected, financing risk, impairment risk.