Core views:
Acquire water assets and continue to extend mergers and acquisitions
On April 13, the company's wholly-owned subsidiary entered into a share acquisition agreement to acquire 97% of the target company's shares for RMB 376 million. After the acquisition is completed, the target company will become a wholly-owned subsidiary of the company. The target company indirectly holds 51% of the asset company's shares. The asset company's main business includes owning, operating, maintaining and repairing water plant facilities, and has obtained exclusive management rights in the designated region of Hohhot, Inner Mongolia. In addition, the target company will acquire 56% and 39% of the operating company's shares in Veolia and Kerry Jianguo Water for RMB 13.3 million, respectively. The operating company's main business includes the operation, management and maintenance of sewage treatment facilities and the supply of treated water.
Entering the Inner Mongolia water market, the scope of business expanded to 18 provincial companies, mainly technology and capital, to expand their business into major markets such as Yunnan, Shandong, Jiangsu, Zhejiang, Heilongjiang, etc., and continued to explore investment opportunities to expand their business to other regions. Through this acquisition of asset companies, the company will once again obtain exclusive management rights in designated regions of Inner Mongolia, extend its business scope to 18 provinces across the country, and help obtain more business opportunities in the Inner Mongolia region in the future.
The new water treatment volume exceeds 400,000 tons/day,
The treatment capacity of the asset company's water plant reached 400,000 tons/day, accounting for 15.2% of the company's total water project treatment volume at the end of 2016. According to the guidelines, the scale of project expansion in 2017 is expected to be the same as in 2016, with asset companies' water treatment volume accounting for 54% of the new water treatment volume added in 2016. The scale of the operating company's water treatment has not been disclosed, and the asset company and the operating company are expected to contribute to the main increase in the company's water treatment volume in 2017.
Profit Forecasts and Investment Ratings
On April 18, 2017, Yunnan Water (6839.HK) closed at HK$3.89. We forecast that the company's 2017-2018 EPS will be RMB 0.424 and RMB 0.547 respectively, with corresponding price-earnings ratios of 8.1 and 6.3 times, respectively. Maintain a “buy” rating.
Risk warning
The progress of the acquisition fell short of expectations; the progress of the project fell short of expectations; exchange rate risk between RMB and HKD.