Incidents:

The company released its 2020 semi-annual report. It achieved operating income of 798 million yuan in the first half of the year, a year-on-year decrease of 0.88%, and Guimu lost 28.24 million yuan in net profit.

Key points of investment:

Order confirmation was blocked in the first half of the year, and cash flow performance was good. The commencement of the company's main business environment comprehensive management project in the first half of the year faced great difficulties affected by the epidemic. Poor personnel circulation led to a large backlog of project orders, and the progress of the project fell short of expectations, which affected the company's operating income in the first half of the year falling 0.88% year-on-year. The share of revenue from the aquaculture ecosystem business with low gross margin increased, causing the company's gross margin to drop 4.4 percentage points year on year in the first half of the year, the company's net profit to the mother turned into a loss year on year in the first half of the year, and the net profit returned to the mother in Q2 for a single quarter was 9.94 million yuan. The company continues to strengthen the collection of accounts receivable. The repayment of new projects was timely. Net operating cash flow in the first half of the year reached 129 million yuan, the second best level for various financial reporting periods since 2016 (preferably the 2018 three-quarter report is 156 million yuan).

The new shareholders' new collaboration and new strategies are clear. In April 2019, New Hope Investment Group Co., Ltd. became the controlling shareholder of the company, and Liu Yonghao became the actual controller of the company. After New Hope took over, a new breeding ecological and environmental protection headquarters was set up on the basis of the company's original water and ecological environment management, water quality monitoring, filter presses, etc., to fully connect with New Hope 6's pig farming business, undertake pig farm equipment and civil engineering, sewage treatment and manure recycling business, and form a synergistic advantage with the new shareholders.

According to New Hope's 2020 semi-annual report, since New Hope 6 released the “Pig Farming Business Strategy Plan” in February 2016, New Hope 6 began rapidly laying out the pig farming business and greatly increased investment in pig farming. By the end of June 2020, the production capacity of New Hope Liuhe's already put into operation reached 18 million heads, the production capacity of the completed project reached 10 million heads by September 30, and the number of pigs released in the first half of 2020 reached 2.12 million heads. Most of New Hope Pig Farming's current construction and preparation projects are located in southeast coastal provinces, close to consumer areas. Environmental requirements and standards are high. With new pig farming projects, the company's demand for equipment and engineering in the field of breeding ecology is expected to continue to grow. At present, the company has developed construction, environmental protection and back-end treatment technology represented by farm construction, wastewater treatment, and “biogas power generation+organic fertilizer production”. It has now signed related contracts of nearly 1 billion yuan and achieved revenue of 228 million yuan in the first half of the year. It is expected to become a new profit growth point for the company in the future.

The environmental management layout is solid, and new orders support the growth in performance. The company previously obtained design consulting, river and lake dredging, medical wastewater, rural sewage, industrial sewage, ecological water environment, etc. engineering construction and operation capabilities through acquisitions and layout of various environmental treatment sub-fields on the basis of the filter press business. Through independent research and development, a cloud platform for intelligent water management and smart environmental IoT management and information processing has been set up. Currently, it has been operated online in Zhejiang, Beijing, Ningxia, Hainan, etc., and occupies the market in the field of water pollution monitoring and monitoring. Through years of layout, the company has now formed a comprehensive water-based environmental management system and comprehensive capabilities to support the company in maintaining a strong ability to take orders. In the first half of 2020, the company added 994 million yuan in non-aquaculture ecological engineering orders, a sharp increase of 167.5% over the same period last year, and on-hand orders reached 1,922 million yuan at the end of the period.

At the end of 2019, the company announced that it intended to privately issue corporate bonds with a period not exceeding 5 years to repay the company's debts and supplement working capital. As the company invested a lot of energy in PPP projects in 2017-2018, which generated high liabilities and accounts receivable, which had a great negative impact on the company's overall assets, liabilities and cash flow, the company's balance ratio reached 74.5% by the end of the first half of 2020. If the company successfully issues bonds this time, in the current relatively low interest rate environment, it is expected to replace the cost of debt with higher interest rates in the past. At the same time, the company currently still has nearly 800 million yuan in hand, and it is expected that part of the working capital will be added after the bond is issued, which will help reduce the loan ratio for new projects. It is beneficial to gradually reduce the company's overall balance ratio from both the debt and asset sides.

First coverage gave the company an “increase in holdings” rating: We believe that the company invested heavily during the period of rapid development of PPP projects, which dragged down the company's financial performance. After New Hope Holdings, the company's business development strategy gradually shifted to smart environmental management and aquaculture ecology. The strategic focus was clear, and the risk control of various projects was greatly improved. The volume of orders for aquaculture ecological business and comprehensive environmental management is sufficient to support the company's performance. The proportion of construction and EPC projects with good cash flow has increased. The implementation of future strategic changes and financial statement improvements are worth looking forward to. Based on the principle of prudence, without considering the impact of the non-public issuance of corporate bonds, we expect the company's EPS in 2020-2022 to be 0.10, 0.13, and 0.23 yuan/share, respectively. Corresponding to the current stock price PE is 40.00, 30.51, and 16.82 times, respectively. This is covered for the first time, giving the company an “increase in holdings” rating.

Risk warning: risk of farming ecological business expansion falling short of expectations; risk of continued decline in comprehensive gross margin; risk of corporate bond issuance.