In terms of operating scale, Kangda International Environmental Protection Co., Ltd. (Kangda Environmental Protection) is a leading private sewage treatment service provider. We are optimistic about Kangda Environmental Protection because the company: (1) is deeply involved in provinces with extreme water shortages; (2) strategically focuses on market segments in secondary cities and counties; and (3) accounting treatment methods cause stock prices to be underestimated. We re-covered Kangda Environmental Protection and gave it a buying rating. The cash flow discount target price is HK$2.21, which is equivalent to 8.1 times the predicted price-earnings ratio for FY17, with room for growth of 38.7%. By the end of 2015, Kangda Environmental Protection had 75% of its sewage treatment capacity in seven of the nine regions with extreme water scarcity in China, and 68% of the sewage treatment capacity was located in Henan and Shandong. In addition to strong demand for sewage treatment, we think these regions will test higher discharge standards and increase sewage treatment fees. Since the company has not entered into any BT (construction-transfer) arrangements, we expect total revenue for the 16/17 fiscal year to increase by 20%/4% year-on-year, respectively, to RMB 2.2/23 billion. Strategically moving to secondary cities and counties as private enterprises, Kangda's environmental protection operations are flexible and efficient, and have cost control capabilities, so it has an advantage in the sewage treatment market in secondary cities or counties. Furthermore, as the company strives to miniaturize sewage treatment equipment and improve the reputation of service grantors, Kangda Environmental Protection will further explore the undeveloped rural sewage treatment market. We forecast that the company's core profit for fiscal year 16/17 will increase by 27%/18% year-on-year to RMB 409/481 million, respectively, and that the net profit margin will remain 19%/21%, slightly higher than 18% in FY15. The accounting treatment method has led to misunderstandings. What is special about Kangda Environmental's accounting treatment of its franchise is that it uses a financial asset model. As of the end of 2015, all of Kangda Environmental's sewage treatment assets were recognized as financial assets because the franchise contract stipulated a minimum amount of sewage treatment. Since guaranteed sewage treatment volume generally accounts for most of the design sewage treatment volume of sewage treatment facilities (reaching 90%-100% starting in the fourth or fifth year), we believe this model reflects strong profit predictability and low volatility. The cash flow discount target price is HK$2.21. Repurchase. Our target price calculated based on cash flow discount is HK$2.21, which is equivalent to 8.1 times the predicted price-earnings ratio for FY17, 1.5 standard deviations below the average price-earnings ratio of 13.5 times lower than the average price-earnings ratio forecast for the past five years, and is significantly lower than the average industry price-earnings ratio predicted by Bloomberg by 14.1 times. We believe the undervaluation is due to poor revenue growth in FY15. Key risks: (1) project acquisitions are weaker than expected; (2) competition weakens profit margins; and (3) interest rate increases.