Acquisition of the remaining 50 per cent of Guamamxayr NewSpring: the company announced on October 26th that Yunnan Water (Hong Kong) Co., Ltd., a subsidiary, intends to acquire 50 per cent of Galaxy NewSpring from Hyflux AssetManagement for a consideration of US $136 million. The company already holds a 50 per cent stake in the target company, and upon completion of the remaining equity acquisition, Galaxy NewSpring will become a wholly owned subsidiary of Yunnan Water, and its financial results, assets and liabilities will be consolidated. As of the first half of this year, Galaxy NewSpring has net assets of US $259 million. Galaxy NewSpring has 24 water supply, sewage treatment and reclaimed water plants in China, with a total treatment capacity of 1.54 million tons per day. On the date of the announcement, the treatment capacity of the water plants it operates is 920000 tons per day, and that of the water plants under construction is 620000 tons per day. Yunnan Water acquired Galaxy NewSpring, focusing on its water supply, sewage treatment and solid waste treatment business in eastern China and Southeast Asia, which is conducive to the company's nationwide water supply and drainage network layout and overseas business expansion. In addition, through the merger and integration of Galaxy NewSpring with its own management advantages and the background of state-owned enterprises, the company is expected to turn losses into profits within a year.
Acquisition of the remaining 40 per cent of Yunnan Zhengxiao Environmental Protection: on October 25, the company announced that it would purchase the remaining 40 per cent of Yunnan Zhengxiao Environmental Protection for 220 million yuan to be wholly owned. Yunnan Zhengxiao Environmental Protection is engaged in medical waste treatment business. is currently the only company in Kunming to legally carry out this business. Through this merger, the company has further expanded the solid waste business sector. with the help of Zhengxiao environmental protection platform, the company will gradually expand the medical waste treatment business outside Kunming, and is expected to obtain higher cost projects and increase the gross profit margin of the solid waste business.
Based on the water industry, to build an integrated service provider for urban environment: Yunnan Water is a PPP model company jointly funded by Yunnan City Investment and Bishui. Its main business covers the full range of water industry chain, such as raw water supply, tap water supply, sewage treatment, construction and equipment sales. Based on the water industry, actively expand solid waste treatment business, carry out industrial hazardous waste treatment, medical waste treatment and other projects.
Valuation and rating: we expect the company's two recent mergers and acquisitions to have a limited impact on the company's profits this year and are expected to further improve next year's profits. We expect the company's annual net profit in 16-17-18 to be 4.12x490x571 million yuan, respectively, and the EPS is 0.34max 0.41max 0.48 yuan (that is, HK $0.39max 0.47max 0.55). The company has a stable operation and rapid growth, and we have given the company a 12-fold PCME in 2017, corresponding to the target price of HK $5.64, maintaining an "overweight" rating.
Risk hint: the sewage treatment and water supply industry is affected by the policy risk, policy changes may have an impact on the performance of the company; the industry concentration is low, the competition is more fierce.