Main points of investment

The first half of the year saw a high increase in performance, in line with expectations. In the first half of 2016, the company achieved operating income of 868 million yuan (RMB, the same below), an increase of 82.7% over the same period last year, and its net profit was 80.2 million yuan, an increase of 70.4% over the same period last year, or 0.07 yuan per share.

The traditional business performed well, while the new business accelerated the high growth of revenue. The overall income of the company increased significantly in the first half of the year, driven by the increase in the operation scale of water supply and sewage treatment projects, the increase in treatment fees, and the increase in the scale of projects under construction, the revenue of sewage treatment and water supply increased by 55% and 164% respectively. In terms of the new layout business sector, the new business sectors of domestic waste power generation and hazardous waste disposal began to merge in the first half of the year, totaling 110 million yuan in revenue. The consolidated gross profit margin in the first half of the year was 32 per cent, down 1 percentage point from the same period last year, dragged down by an increase in the proportion of water supply business with relatively low gross margins. Active mergers and acquisitions after listing and recent construction of a large number of projects have led to an increase in financial expenses from 38 million yuan to 0.79 yuan. Affected by the expansion of the scale of operational projects, the scale of accounts receivable in the first half of the year increased to 239 million yuan from 120 million yuan in the same period last year.

With the steady progress of the project, the layout of business outside the province is getting better and better. In order to consolidate the leading position of water services in Yunnan Province and actively expand the water market outside the province, the company is planning to acquire GALAXY NEWSPRING (50%), which further strengthens the development strategy of the company's business layout outside the province. Upon completion, the proportion of projects outside the province will rise sharply to about 60% from 32.2% at the end of 2015, and the scale of water outside the province will surpass that of Yunnan province for the first time. From the perspective of project scale and regional distribution, the outstanding quality and poor management of GALAXY projects are the key reasons for its poor operation in the past. The company is currently exploring a new model of regional centralized management to strengthen coordination and improve efficiency, taking into account the company's management experience and rich government resources, the follow-up is expected to improve the profitability of the proposed acquisition target through a variety of measures such as improving management efficiency, cutting costs and improving the relationship between the project and the local government. We expect the project to be restructured for about one year. After the follow-up operation is normalized, the annual net profit of the proposed acquisition object may exceed 100 million yuan, which will inject medium-and long-term impetus into the company's performance growth.

With the development of the three major areas, comprehensive environmental service providers have basically taken shape. While maintaining the "big water" model covering all raw water, tap water and sewage treatment, the company actively improves its business layout through mergers and acquisitions and transforms to a trinity integrated environmental service provider of water, solid waste and hazardous waste. Judging from the development of the company in the first half of the year, the transformation of the company is smooth, and solid waste-hazardous waste has grown into a key growth point. Through the acquisition of Harbin Guohuan (100%) and Chen Neng University of Technology (76%), the company acquired the only two enterprises in Heilongjiang with the qualification of hazardous waste incineration, which have a competitive advantage in the province's hazardous waste market. At present, there are five hazardous waste treatment projects, with a total treatment capacity of 928,000 tons / year, of which 102,000 tons / year has been put into operation, which is in the leading level in China. At present, there are three waste power generation projects, which are located in Fujian and Thailand, with a total treatment capacity of 2000 tons per day, among which Thailand waste power generation project has strong profitability.

Risk hint. The progress of the project under construction is uncertain; the progress of the new project is lower than expected; exchange rate risk and so on.

Maintain a "buy" rating. Taking into account the reported results in line with expectations, maintain the 2016-2018 EPS forecast of 0.34max 0.43Universe 0.52 yuan, the current share price corresponding to Pamp E is 12-9-8 times. Considering that the company's performance is expected to continue to grow at a high rate, with advantages in membrane treatment technology, rich experience in the PPP field, the effectiveness of the diversified layout of hazardous and solid waste business, and the M & A strategy is expected to continue to promote high performance growth and other factors, with reference to the industry valuation and the company's historical valuation, the company will be given a 14-fold Pamp E in 2016, corresponding to the target price of HK $5.48, maintaining a "buy" rating.