We will hold a non-trading roadshow after the Southern Water Management Business on August 31 to discuss the 1H16 business and update planned and future development data.
High quarterly factors of water income in southern Yunnan: investors do not seem to understand the company's relatively low 1H16. Compared with our annual forecast of about 400 million yuan, there is a gap of 8000 million yuan in the first half of the year. In fact, the profit in the first half of the last half of last year has been maintained at a high quarterly ratio of about 2:8, because there is usually more construction income and EPC and equipment sales in the second half of the year.
In view of the current construction progress of water projects and the fact that some BT projects will be launched in the expected period, we think that the situation of 2H16 profits will be the same. We think that with the further increase in the operating income of Yunnan water services, we can account for the quarterly factors of construction income, and this situation may improve.
Updated data on receiving Galaxy Newspring: the first 50% of the shares of Galaxy Newspring (GNS) transferred from Mitsui will be completed in September 2016. Management remains confident that it will buy 50% of its shares in GNS from Hyflux. The next step of the Nanshui Water Service is to finance the whole project. At present, overseas US dollar coupons / coupons are the choice of water preference in South China. In our current business model, we reflect that the joint venture has a record of 2000 yuan after the first 50% of the water revenue in South China. We have not reflected the factors contributing to the improvement in GNS's profitability because we believe that cost agreement and usage premium can only be realized after the acquisition of GNS100% shares by Jinan Water.
A high failure rate of 80 per cent will continue to be recorded in the next two years: the 1H16 failure rate has risen to 84 per cent, compared with 34 per cent at the end of 2015. 1H16 short term: long term loan ratio is 2:1. The company has announced the issuance of 10 yuan worth of company bonds and 10 yuan of property mortgage loans, and is negotiating with the bank to reach a long-term debt payment of 1.9 billion yuan, thus reversing the ratio of long-term and short-term loans. We still expect that the air pollution rate of 2016-18e for southern water services will remain at a high level of about 80%.
Although it is slightly lower profit forecast, it still holds a strong view of the company; maintain the "profit forecast" level: our lower profit forecast of 2016-18e is 4.3%, 2.2% and 5.6%, to reflect the progress of construction, the acquisition of 50% of GNS shares and high operating expenses. As our valuation base remains unchanged at 16 times earnings, our target has been lowered from HK $6.68 to HK $6.35. Despite the profit forecast, we still hold a strong view on the water service in South China. Since the listing of a series of wastewater treatment and solid disposal projects, Jinan Water has become an integrated environmental protection service company. We hope that the management will work out a clear growth target after achieving a larger model, so that the southern water sector can achieve a better valuation. The next catalyst for the South Water Project may be the further development of water-related PPP projects. Maintain the "promotion" level.