The performance is in line with expectations, and it is expected that epitaxial mergers and acquisitions will bring performance improvement.
The annual report results are in line with expectations: according to the company's annual report, the company achieved operating income of 749 million yuan in 2016, an increase of 23.91% over the same period last year, and its net profit was 47.396 million yuan, down 10.39% compared with the same period last year. The performance is in line with expectations.
Management expenses increased, financial expenses increased significantly, non-operating income decreased significantly: in 2016, under the original sales model, the company gradually developed to new models such as PPP and BOT, printing and dyeing wastewater development business was gradually promoted, and the company's operating income increased steadily. At the same time, the company increased its R & D investment, and its management expenses reached 122 million yuan, an increase of 13.87 million yuan over 2015; the company's short-term borrowing increased, interest expenses increased, and financial expenses increased by 53% compared with the same period last year; the company's government subsidies decreased significantly compared with 2015, and non-operating income decreased by 64% compared with the same period last year. The increase of management expenses, the large increase of financial expenses and the substantial decrease of non-operating income are the main reasons for the decline of the company's performance.
Epitaxial mergers and acquisitions are expected to bring a new driving force for growth: at the end of September 2016, the company issued a fixed increase plan to acquire 100% equity in Jiangsu Kaimi and Jinqiao Shuike by issuing shares (15.22 yuan per share) plus cash (318 million yuan). Jiangsu Kami is mainly composed of tubular membrane, ceramic membrane and other membrane modules, deep ploughing leachate, industrial wastewater and other fields, while Jinqiao Water Department is a large water group in Northwest China, with complete qualifications for various projects and contracts. If the merger and acquisition can be successfully completed, the company will further expand the application field of its own membrane technology, at the same time, it will supplement a number of construction and contracting qualifications in the water treatment industry, and the company's project undertaking capacity will go up to another floor.
Performance commitment ensures performance growth: Jiangsu Cami and Jinqiaoshuike make performance commitments, Jiangsu Kami performance committers promise that Jiangsu Kemi's net profit in 2016, 2017 and 2018 will not be less than 60 million yuan, 75 million yuan and 93.75 million yuan, respectively; Jinqiao Water Science performance committers promise that the net profits of Jinqiao Water Science in 2016, 2017 and 2018 will be no less than 25 million yuan, 32.5 million yuan and 4225 yuan, respectively. The performance commitment of Jiangsu Kaimi and Jinqiao Water Division brings guarantee for the company's performance growth.
Supporting financing to strengthen the company's state-owned enterprise background, to help the company obtain PPP orders: in the supporting financing plan of this M & A, the company plans to issue no more than 24.84 million shares to Hi-tech Investment (the third largest shareholder of the company), Hebei Construction Investment Water, Jianxin Natural and Jingdezhen Runxin Changnan, and raise no more than 378 million yuan. High-tech investment, construction investment water and other state-owned enterprises are expected to enhance the company's background of state-owned enterprises, is expected to better help the company to obtain relevant PPP orders.
Sufficient project reserves, looking forward to future performance release: according to the annual report, by the end of 2016, the company has 42 orders in hand, with an order amount of 480 million yuan, and the company has a solid foundation for future performance release. According to the forecast of the company's first-quarter results in 2017, the company's first-quarter net profit is expected to be 1.1121 million yuan to 1.4457 million yuan, an increase of 0% and 30% over the same period last year.
Investment suggestion: the company is expected to complete the acquisition of Jiangsu Cami and Jinqiao Water Science in 2017. If the acquisition is successfully completed, the company will expand the application field of membrane products and enhance its engineering construction capacity. We estimate that the company's EPS for 2017-2019 will be 0.48,0.59,0.72 yuan, corresponding to PE 35.8X, 28.9X, 23.9X, with a "buy-A" rating and a 6-month target price of 22 yuan.
Risk hint: the progress of fixed increase is not as expected, and the integration of mergers and acquisitions is not as expected.
