Investment proposals Jiangnan Water released its 2016 mid-year report. The company achieved operating income of 574 million yuan (+55.85%), net profit attributable to shareholders of listed companies of 171 million yuan (+51.94%), and EPS of 0.18 yuan (+50%). We expect the net profit attributable to the company in 16-18 to be 3.90, 4.85, and 565 million yuan respectively, corresponding EPS of 0.42, 0.52, and 0.6 yuan. The current valuation of the corresponding company is 20.9 times, 16.9 times, and 14.7 times. We are optimistic about the company's transformation from a traditional water enterprise to a comprehensive environmental protection platform. The company's official entry into the trillion-dollar market for water environment management has huge space, and we give it a highly recommended rating. Key investment points: the company achieved revenue of 574 million yuan (+55.85%) and net profit attributable to shareholders of listed companies of 171 million yuan (+51.94%), of which engineering installation and tap water business revenue each accounted for 57% and 40% of total revenue, and the engineering installation business increased 147.3% year-on-year, driving a significant increase in performance, mainly due to the significant business development results of the company's wholly-owned subsidiary Municipal Engineering Company in the first half of the year. The revenue of municipal engineering companies in the first half of the year reached 390 million yuan (67.9 percent of total revenue) %), contributing $124 million in net profit (accounting for 72.5% of total net profit). The tap water business is developing steadily, and the margin between production and sales remains at the first-class level in the industry: the company completed 128 million cubic meters of water supply (+5.85%), completed 51.07% of the annual plan, completed 117 million cubic meters of water sales (+4.67%), and completed 53.08% of the annual plan. The average daily water supply volume is 701,500 cubic meters; the production and sales margin is 8.53%, and the overall water quality qualification rate is 100%, maintaining a first-class level in the industry. The company's profitability is outstanding: the company's overall net profit margin is 29.85% (-0.77pct), and the overall gross profit margin is 53.47% (-2.97pct). Among them, the gross margins of the tap water business and engineering installation were 49.95% (-4.37%) and 56.88% (-2.77%), respectively. Although there has been a decline, they have remained at a high level. The sewage treatment business is developing rapidly: Huangtang Sewage Treatment Company concentrated on surveying enterprises and signed sewage treatment contracts with 141 companies, with a year-on-year increase of 25%; the Nanzha Sewage Treatment Plant undertook the construction of internal sewage networks for 16 new enterprises. Both sewage plants have completed the price adjustment of industrial wastewater treatment fees and the solid waste disposal business has started preliminary work: Jiangyin Jinxiu Jiangnan Environmental Development Co., Ltd. has begun preliminary work such as the EIA of the Qinwangshan Industrial Waste Comprehensive Utilization Project in Jiangyin City. Set up a PPP industry fund to carry out innovative business: In March of this year, the company signed an agreement with Huakong SEG, Huaneng Technology, Yuze Investment, and Taihong Environment to jointly establish a 5 billion yuan industrial fund with an initial scale of 1.5 billion yuan, of which Jiangnan Water invested 200 million yuan, accounting for 13.33%. It is mainly used for equity investment in Huasai's sponge city project construction, PPP projects such as “black and smelly water bodies”, and environmental monitoring and evaluation of equipment manufacturing. This strong alliance means that Jiangnan Water has officially entered the trillion-dollar market for water environment management. Huasai and Huaneng are leading enterprises in these two major fields. Coupled with Jiangnan Water's excellent engineering and water service operation capabilities, it will produce synergistic benefits. The company's transformation is firm, and a comprehensive environmental protection platform can be expected: the company has been actively transforming and expanding its environmental protection business for the past 2 years. In 2015, the sewage treatment capacity was increased by 25,000 tons/day through acquisitions, and the sewage business revenue increased by 17.6%. In addition, at the end of 2015, the company also established a solid waste company to expand hazardous waste and other businesses. Participating in the establishment of an industrial fund this time, the company actively invests in the trillion-dollar water environment treatment market and is expected to become the fastest growing environmental protection company in the next 3-5 years. Risk warning: PPP progress falls short of expectations