Key investment events: On April 10, the company disclosed its 2016 annual report. During the reporting period, the company achieved operating income of 488 million yuan and net profit to mother of 69.538 million yuan, an increase of 48.08% and 33.24%, respectively. The company plans to distribute a cash dividend of 1.27 yuan (tax included) to all shareholders for every 10 shares based on the company's total share capital as of March 31, 2017, and transfer 20 shares for every 10 shares to all shareholders using the capital reserve fund. At the same time, the company released a performance forecast for the first quarter of 2017. The company is expected to lose 0-2 million yuan from January to January 2017. Jiangsu Huada also contributed to growth throughout the year, and overall gross margin declined: the company's three major sources of revenue: equipment sales (including complete water treatment equipment, centrifuges and supporting sales), operation services, and municipal sewage investment and operation. Since November 1, 2015, Jiangsu Huada has contributed 192 million yuan in centrifuge manufacturing business revenue, accounting for 39.25% of total revenue. Due to the lengthening of the current consolidation period, the centrifuge manufacturing business surged 338.45% year on year. At the same time, the company's water environment management and contract environment operation services were carried out smoothly, bringing operating service revenue of 137 million yuan, an increase of 66.22%, accounting for 28.08% of total revenue; the above increase made up for the decline in sales of complete water treatment equipment, leading to a year-on-year increase in the company's overall revenue 48.08% The company's overall gross margin decreased by 5.28 percentage points, resulting in a net profit growth rate lower than the revenue growth rate. The merger of Jiangsu Huada and Sitong Environmental increased the company's net operating cash flow by 416.04% year on year. Policies promote the release of space for treatment of black and smelly water bodies, and the company's technological leadership has clearly benefited: policies such as the “Water Pollution Prevention and Control Action Plan”, “Urban Black and Smelly Water Remediation Work Guidelines”, and “Opinions on Fully Implementing the River Chief System” put forward clear requirements for the treatment of black and smelly water bodies, and black and smelly water bodies in urban built-up areas will generally be eliminated by 2030. The company's magnetic separation technology and supermagnetic separation technology are very suitable for metallurgical turbidity ring water treatment, coal mine water treatment, and river lake landscape water environment treatment. Despite a decline in sales of the company's complete water treatment equipment due to a decrease in the number of new transformation projects in the metallurgical and coal industry, the company actively expanded the fields of black and smelly water treatment, watershed management, sponge city construction, etc., and won the bid for the first PPP project in August 2016: emergency treatment project to improve the water quality in the exit section of Yuhedongdian, Pinggu District, Beijing. The annual government subsidy transaction cost was 15.79 million yuan/year, setting a good start for the company's PPP business. Epitaxial mergers and acquisitions improve the industrial chain and enhance performance: During the reporting period, the company completed 100% equity expansion of Daoyuan Environment and 65% equity expansion of Sitong Environment, forming a Song Shan industrial chain covering front-end consulting, engineering design, production and sales of industrial equipment, engineering turnkey and operation management services. Sitong Environmental is mainly engaged in municipal sewage treatment investment and general contracting services for sewage treatment projects. Its municipal sewage treatment capacity is 86,000 tons/day and 25,000 tons/day, respectively, and the BOT and PPP municipal sewage treatment capacity to be built is 51,400 tons/day and 25,000 tons/day, respectively, for a total of 187,400 tons/day. Together on November 30, 2016, Sitong Environmental contributed approximately RMB 5.66,400 in revenue during the reporting period, accounting for 1.16% of total revenue. In 2017, Sitong Environmental was combined for the whole year. It is likely that it will fulfill its performance promise and contribute more than 25 million yuan in performance. Non-public offerings and employee stock ownership plans raise the safety margin of stock prices: In the transaction where the company issues shares and pays cash to purchase assets (65% of the shares in Sitong Environment) and raise supporting capital, the non-public offering price was 32.03 yuan/share; in addition, the first phase of the company's employee shareholding plan has completed stock purchases, and the average transaction price is about 31.91 yuan/share, increasing the stock price safety margin. Investment advice: We are optimistic about the company's development prospects in the field of water environment management. We predict that the company's earnings per share from 2017 to 2019 will be 0.62, 0.79, and 1.00 yuan, respectively. The six-month target price is 34.3 yuan, which is equivalent to a dynamic price-earnings ratio of 55 times that of 2017. Risk warning: PPP project progress falls short of expectations, consolidation risks