Event

Shandong Zhanggu issued an announcement on the evening of April 26, 2015, announcing that the major asset restructuring of Shandong Liancheng failed due to the lack of agreement on the relevant terms of cooperation, and the shares will resume trading on April 27.

At the same time, the company reported in the first quarter of 2015 that its operating income was 105 million yuan, down 19% from the same period last year, and its net profit was 11.96 million yuan, down 27% from a year earlier. The company expects the net profit attributed to shareholders of listed companies to change from 26.03 million yuan to 37.19 million yuan from January to June 2015, a year-on-year change of-30%.

Comment

On the surface, the failure of this major restructuring is bad, but in fact, it does not hinder the development of the company's main business and the continued exploration of the extension development in the future: the company's traditional main business is facing greater growth pressure, under this background, the company tries to acquire Shandong Liancheng to seek a dual-main business operation mode, which is the company management's careful consideration and choice of the company's development strategy. The company has not done a capital operation for many years, although this major asset restructuring failed, it also indicates that the company is beginning to make a breakthrough in the demand for epitaxial development, and we expect it to take more actions in the future.

With the release of the Water Ten policies, the company will seek more opportunities for main business extension. After the release of the Ten Water policies, China will gradually enter the peak period of water treatment. The company's main product Roots blower has obvious economy under small flow conditions, and is the first choice for small sewage treatment plants at the township level, and its demand is expected to be significantly boosted. In addition, due to the small scale of the Roots blower industry, the company is also actively looking for the expansion of centrifugal blowers and other products, and is expected to extend to the lower reaches of the industrial chain, gradually cut into the water treatment operation link, and open the company's growth bottleneck.

The company's performance declined sharply in the first quarter, and the performance growth during the year was under pressure: affected by the economic downturn, the company's main downstream industries such as steel, cement, coal and other industries continued to decline, and the company's orders in the first half of the year declined to a certain extent compared with the same period last year. At the same time, in the first quarter of this year, due to the greater financial pressure faced by customers, the withdrawal payment was delayed, resulting in some orders unable to recognize revenue in time. We expect the company's overall performance growth in 2015 to be weak, but the rapid growth of the water treatment industry will be a bright spot.

Investment suggestion

The company suspended trading for more than three months, while the SW general machinery sector surged nearly 72 per cent over the same period (average time: 20150115-20150427), with the three stocks with the smallest gains averaging 21 per cent. Before the suspension, the market capitalization of the company is only 2.84 billion yuan, which is the smallest stock in the general machinery sector. The company's PE (TTM) is 37 times, which is at a low level in the industry. We expect the company's stock price to have a supplementary demand.

We forecast that the company's EPS from 2015 to 2017 will be 0.17,0.21 and 0.24 yuan respectively, maintaining the "overweight" rating, with a target price of 12 yuan.