Main points of investment

Event: the company announced today that it will issue 600 million yuan in a non-public offering. In this regard, our comments are as follows:

Comment

Unpublicly raised 600 million yuan to officially complete the issue, in-depth cooperation with Bizhui to increase the size of environmental protection water. 1) Overview of the fixed increase plan: this additional issue has a total of 107 million share capital, raising 600 million funds, and the issue price per share is 5.59 yuan. Fujian Zhanglong, the controlling shareholder, subscribed 400 million, and Biyuan subscribed 200 million. The lock period is three years, and the sales period is limited to January 6, 2020. Of this amount, 450 million is used for the construction of water projects and 150 million for supplementary working capital. 2) Bishui will participate in the three-year fixed increase, and strategic cooperation will continue to advance in depth: after the completion of this additional offering, Bishui will hold a 3.6% stake in the company. In addition, the company has carried out multi-faceted cooperation with Bishui: Fujian Zhang Fabi Water Source Technology (51% owned by the company) was established in December 2015, mainly engaged in environmental protection projects and sewage treatment project operation. In October 2016, Bishuiyuan Water purification Technology and Fujian Zhangfa Automobile, a subsidiary of the company, signed the Regional exclusive Distribution Agreement for Biyuan Water purification products. Zhangfa Automobile is authorized as a channel dealer to exclusively distribute "Biyuan" water purification products in Fujian Province, with a validity period from October 28, 2016 to December 31, 2017. We believe that Bishui's participation in the three-year increase is the deepening of the previous series of cooperation and helps to enhance the company's professional ability in the field of environmental protection and water affairs.

Liqing main business, to build Zhangzhou local public utility platform.

Liqing main business, gradually stripped of import and export trade, car sales, real estate and other non-core assets accelerated. A) divestiture of the shares of Agricultural Commercial Bank: in December, 13 years, 8% equity of Zhangzhou Agricultural Commercial Bank was transferred to Fujian Zhanglong, the controlling shareholder, with a transfer price of 230 million. B) divestiture of primary land development assets: in December 2014, 100% equity in Jinfa Development, Longsheng Development and Zhaosheng Development, three wholly-owned subsidiaries involved in the first-tier land development business, was transferred to the controlling shareholders. The transfer price is 210 million. After this equity transfer, the company will no longer participate in the first-level land development business. C) transfer of import and export trade assets: in July 2015, the company transferred 100% equity of Shengfa Import and Export Company, a wholly-owned subsidiary, to Fujian Zhanglong, the controlling shareholder, for 24.19 million yuan. D) divestiture of automobile sales assets: in September 2016, the company transferred the% equity of Huajun Fuyuan Automobile sales Company, a wholly-owned subsidiary of Huajun Fuyuan Automobile sales Company, to the asset operation company of the wholly-owned subsidiary of Zhanglong Group, the controlling shareholder. This transfer is expected to increase the profit of the company's annual consolidated statement by about 26 million yuan. 5) transfer part of the real estate equity: in November 2016, the company transferred 57% of its wholly-owned subsidiary Xinhe Real Estate to Jiulongjiang Group and Tongfa Real Estate, a subsidiary of Zhangzhou State-owned assets Supervision and Administration Commission. After the transfer, the company will hold a 43% stake in Xinhe Real Estate and will no longer merge the table. The impact of the transfer of 57% of the equity interest in Xinhe Real Estate and the current income included in the remaining 43% equity investment cost at fair value on the company's 2016 consolidated statement net profit amounts to 244 million yuan.

The formation of real estate business, car sales and environmental protection water three major business systems. The company's net profit in 2015 was-84 million yuan, of which water engineering (Zhangfa construction), water operation, trade (including parent company), automobile sales and real estate contributed net profits of 0.19,0.18,0.75,-0.47 and-1 million yuan, respectively. After a series of divestitures, the company has formed three major business systems: real estate, automobile sales and environmental protection water.

Strategic planning of environmental protection water affairs: endogenesis and extension become bigger and stronger, and create a regional public utility platform. The main points of the company's existing environmental protection business are as follows: 1) focus 1: the gradual commissioning of existing stock projects. At present, the company has formed 200000 tons of tap water and 175000 tons of municipal sewage treatment scale. In the fund-raising project, in addition to Dongdun sewage treatment plant has been put into operation, Nanjing County, Pinghe County and Jinfeng Waterworks are the main increments of the company's existing water business. 2) focus 2: Zhangzhou area water market integration, enhance regional market share: the entire Zhangzhou area tap water stock scale of 600000 tons, municipal sewage stock scale of 300000 tons. The development of Zhangzhou is expected to integrate the regional water market with the help of the resources of SASAC and increase its market share. 3) focus 3: extension out of Zhangzhou to strengthen the comprehensive service capacity of environmental protection. We believe that this increase will greatly enrich the company's capital operation capacity, help the company to expand mergers and acquisitions out of Zhangzhou, and strengthen the comprehensive service capacity of environmental protection. In our previous report "Local Public Utilities platform, the Best Age", we emphasized that as the beneficiaries of regional investment and financing changes, the Water supplies Unit has a more prominent position in the future. 1) document No. 43 to strengthen local debt management, there is an urgent need to seek a new model of financing: local water units and PPP become the beneficiaries of regional investment and financing system reform. 2) the core of the new model is to enhance the financing and hematopoietic capacity of local platform companies: typical cases show that local state-owned assets can restore and improve the hematopoietic function of water companies by introducing strategic investors, giving priority to local PPP projects, price increases, asset injection, equity incentives and so on. 3) under the current background, local state-owned assets have the power and ability to build a new investment and financing system. The development of Zhangzhou is expected to become a new model of local state-owned assets development.

Investment advice: maintain the overweight rating. We expect the attributable net profit for 2016-2017 to be 2.7 (of which 240 million of the non-recurrent gains on the disposal of assets), 110 million, and the current market capitalization of 5.3 billion. We believe that 1) the company is gradually divesting automobile sales, import and export trade, land development and other businesses, focusing on environmental protection business in the future, and creating a new regional public utility platform. 2) A fixed increase of 600 million yuan will be raised in three years to increase the environmental protection water supply, and the issue price is 5.59 yuan per share (the current price is 5.30 yuan per share). Biyuan will participate in the fixed increase of 200 million to achieve complementary resources and help the company to transform its environmental protection. Based on this, maintain the overweight rating.

Risk tip: the transformation of environmental protection business is lower than expected