Key investment points Kangda Environmental Protection announced on August 4: Following competitive consultation, Yunan County Environmental Protection Bureau, Kangda Group and Guangdong Liangke recently initiated a contract for bundled PPP projects for domestic sewage treatment throughout Yunan County. The first PPP project was launched, with both demonstration effects and good returns. Yunan County is a dual model county for rural sewage treatment in Guangdong Province and the whole country. The bundling of PPP projects throughout the county is of great demonstration significance. The project is also Kangda Environmental Protection's first PPP project. With financial support from agricultural distribution, financial costs are low, and the overall internal rate of return is expected to be ideal. PPP is expected to become an important new growth point for the company in the future. The PPP policy invigorates the sewage market in small towns, and the trillion-dollar blue ocean of the water supply market is expected to break the game. There has been a large gap in sewage treatment facilities in small towns in China for a long time. Under the impetus of the new PPP policy, financing and investment recovery models have been greatly improved. The grass-roots water market is expected to be activated, and the small-town water market will become a trillion blue ocean. Kangda Environmental Protection focuses on sewage treatment in small and medium-sized cities, and has obvious advantages in expanding grass-roots water projects. Kangda Environmental Protection has been deeply involved in the domestic sewage treatment market in third- and fourth-tier cities for more than 20 years, and has accumulated rich experience in the operation of small and medium-sized projects and grass-roots government resources. Larger water groups will have an advantage in expanding grass-roots water projects in the future. Investment advice: The current market unanimously expects Kangda Environmental's net profit of $397 million (equivalent to HK$461 million) in 2016, corresponding to 6.77 times the current stock price of PE and only 0.83 times PB. The valuation is low and there is a margin of safety. Investors are advised to pay active attention. Risk warning: Competition in the sewage treatment market has intensified, the number of new projects has not met expectations, and the RMB continues to depreciate.