Core views:
Net profit increased 35.7%, and the share of solid waste business increased to 15%
In 2016, the company achieved operating income of RMB 2,866 million, an increase of 83.9% over the previous year; the net profit returned to the mother was RMB 388 million, an increase of 35.7% over the previous year. The decline in gross margin (from 32.6% to 30.7%) and the sharp increase in financing costs (+4x) dragged down the net profit growth rate. The decline in gross margin was mainly due to an increase in the share of solid waste treatment business with slightly lower gross margin (increase from 0.5% to 14.8%) and lower initial unit prices for new water supply projects.
Sewage treatment: The scale of operation increased steadily, and the average treatment cost increased by 10%
By the end of 2016, the company had 67 franchised sewage projects under construction or operation, with a sewage treatment capacity of 1,379 million tons/day, an increase of 34.7% over the previous year; the sewage treatment volume of the projects put into operation was 1.124 million tons/day, an increase of 46.2% over the previous year. In 2016, the average sewage treatment fee was 1.17 yuan/ton (+10%).
Water supply: The scale of operation increased by 85%, and the utilization rate increased by 5%
By the end of 2016, the company had 31 water supply franchise projects under construction or operation, with a total water supply of 1,016 million tons/day, an increase of 57.3% over the previous year.
The water supply capacity of the projects already in operation was 675,000 tons/day, an increase of 46.2% over the previous year. In 2016, the actual water supply utilization rate was 70.1%, an increase of 5%.
Solid waste treatment: Actively expand the solid waste business, and the scale of treatment increased 1.42 times
By the end of 2016, the company had 7 solid waste treatment projects, with a total treatment capacity of 985,000 tons/year. Among them, 6 projects have been put into commercial operation, with a scale of 729,000 tons/year, a year-on-year increase of 1.42 times. The company's actual solid waste treatment utilization rate was 89.1% (+3.4%).
Construction and equipment sales: Increased revenue contribution from EPC and equipment sales
By the end of 2016, the company had 11 BT projects under construction or completed, of which 9 projects (+3) confirmed benefits during the reporting period; had 7 EPC projects, an increase of 2 over the previous year. The increase in construction and equipment sales revenue was mainly contributed by EPC and equipment sales revenue.
Profit Forecasts and Investment Ratings
On April 7, 2017, Yunnan Water (6839.HK) closed at HK$3.96. We forecast that the company's EPS in 2017-2018 will be RMB 0.424 and RMB 0.547 respectively, with corresponding price-earnings ratios of 8.3 and 6.4 times, respectively. Maintain a “buy” rating.
Risk warning
Risk of project progress falling short of expectations; exchange rate risk between RMB and HKD.