Key points of investment

Incident: The company announced today that it raised 600 million dollars privately and officially went public. Our comments on this are as follows:

reviews

A private fund raising of 600 million dollars was officially completed, and there was in-depth cooperation with Bishuiyuan to increase the environmental protection of water. 1) Overview of the fixed increase plan: A total of 107 million additional shares were issued this time, 600 million dollars were raised, and each share was issued at a price of 5.59 yuan. Fujian Zhanglong, the controlling shareholder, subscribed for 400 million dollars, and Bishuiyuan subscribed for 200 million. The lockdown period is three years, and the sale period is limited to January 6, 2020. Of this amount, 450 million was used for the construction of water projects and 150 million was used to supplement working capital. 2) Bishuiyuan participated in the three-year fixed increase, and strategic cooperation continues to advance in depth: after this increase is completed, Bishuiyuan will hold 3.6% of the company's shares. In addition, the company has developed multi-faceted cooperation with Bishuiyuan in the early stages: in December 2015, Fujian Zhangfabi Water Technology (the company holds 51% of the shares), which specializes in environmental engineering and sewage treatment project operation; in October 2016, Bishuiyuan Water Purification Technology, a subsidiary of Bishuiyuan, and Fujian Zhangfa Automobile, a subsidiary of the company, signed a “Regional Exclusive Distribution Agreement for Bishuiyuan Water Purification Products”, authorizing Bishuiyuan Automobile as a channel dealer to exclusively distribute “Bishuiyuan” water purification series products in Fujian Province, valid from October 28, 2016 to 2017/12 The 31st of the month. We believe that Bishuiyuan's participation in the three-year fixed increase this time is a deepening of a series of early cooperation and will help enhance the company's professional capabilities in the fields of environmental protection and water services.

Liqing's main business is to build a local utility platform in Zhangzhou.

Liqing's main business is gradually divesting non-core assets such as import and export trade, automobile sales, and real estate to accelerate.

a) Divestment of shares in Agricultural Commercial Bank: In December '13, 8% of Zhangzhou Agricultural Commercial Bank's shares were transferred to Fujian Zhanglong, the controlling shareholder, with a transfer price of 230 million yuan. b) Divestment of first-level land development assets: In December 2014, 100% of the shares of Jinfa Development, Longsheng Development, and Zhaosheng Development, the three wholly-owned subsidiaries involved in the first-level land development business were transferred to the controlling shareholders. The transfer price is 210 million. After this equity transfer, the company no longer participated in first-level land development business. c) Transfer of import and export trade assets: In July 2015, the company transferred 100% of the shares of its wholly-owned subsidiary Shengfa Import & Export Company to Fujian Zhanglong for 24.19 million yuan. d) Divestment of automobile sales assets: In September 2016, the company transferred 100% of the shares of Huajun Fuyuan Auto Sales Company, a wholly-owned subsidiary, to the asset management company of the controlling shareholder, Zhanglong Group, for 29.81 million yuan.

The transfer is expected to increase profits to the company's annual consolidated statements by about 26 million yuan. 5) Transfer of some real estate shares: In November 2016, the company transferred 57% of the shares of Xinhe Real Estate, a wholly-owned subsidiary, to Jiulongjiang Group and Tongfa Real Estate under the Zhangzhou State-owned Assets Administration Commission for 250 million yuan. After the transfer, the company will hold 43% of Xinhe Real Estate's shares and will no longer be listed. The impact of the current income included in the transfer of 57% of Xinhe Real Estate's shares and the remeasurement of the remaining 43% equity investment costs at fair value on the company's 2016 consolidated statement was 244 million yuan.

Three major business systems have been formed: real estate business, automobile sales, and environmentally friendly water services. The company's net profit in 2015 was -84 million yuan, of which water engineering (Zhangfa Construction), water operations, trade (including the parent company), automobile sales, and real estate contributed 0.19, 0.18, -0.75, -0.47, and -01 billion yuan respectively. After a series of divestments, the company formed three major business systems: real estate, automobile sales, and environmentally friendly water services.

Environmental water strategic planning: expand and strengthen endogenous extension to build a regional utility platform. The main highlights of the company's current environmental protection business are as follows: 1) Highlight 1: The gradual commissioning of existing stock projects. The company has now formed a scale of 200,000 tons of tap water and 175,000 tons of municipal sewage treatment. In addition to the Dongdun Sewage Treatment Plant, which has already been put into operation, the Nanjing County, Pingping County, and Jinfeng Water Plant are the main additions to the company's existing water business in the fund-raising projects. 2) Highlight 2: Zhangzhou regional water market integration to increase regional market share: the entire Zhangzhou region has 600,000 tons of tap water stocks and 300,000 tons of municipal sewage. The development of Zhangzhou is expected to use the resources of the Municipal State-owned Assets Administration Commission to integrate the regional water market and increase its market share. 3) Highlight 3: Outreach beyond Zhangzhou to strengthen comprehensive environmental protection service capabilities. We believe that this planned increase will greatly enrich the company's capital operation capabilities, help the company extend mergers and acquisitions out of Zhangzhou, and strengthen its comprehensive environmental protection service capabilities. In our previous report “Local Utility Platforms, the Best Era”, we emphasized that as beneficiaries of regional investment and financing changes, water stocks will have a more prominent position in the future. 1) Document No. 43 strengthens local debt management, and financing urgently needs to seek new models: local water stocks and PPP have become beneficiaries of changes in the regional investment and financing system; 2) The core of the new model is to enhance the financing hematopoietic capacity of local platform-based companies: typical cases show that local state-owned assets can restore and improve the hematopoietic function of water companies by introducing strategic investors and prioritizing local PPP projects, price increases, asset injection, equity incentives, etc. 3) In the current context, local state-owned assets have the motivation and ability to build new investment and financing systems. However, the development of Zhangzhou is expected to become a new model for local state-owned assets development ideas.

Investment advice: Maintain the increase in holdings rating. We expect net attributable profit for 2016-2017 to reach 2.7 billion (including 240 million non-recurring income from disposed of assets) and 110 million, with a current market value of 5.3 billion. We believe 1) The company is gradually divesting business such as automobile sales, import and export trade, land development, etc., and will focus on environmental protection business in the future to build a new regional utility platform. 2) The three-year term will raise 600 million yuan plus Environmental Water, with an issue price of 5.59 yuan/share (current price 5.30 yuan/share). Bishuiyuan participated in the 200 million fixed increase to achieve complementary resource advantages and help the company's environmental transformation. Based on this, the increase in holdings rating was maintained.

Risk warning: Environmental business transformation falls short of expectations