Kangda Environmental Protection is a leading private environmental protection water enterprise in China. Kangda Environmental Protection was listed on the main board of the Hong Kong Stock Exchange in 2014 and was one of the first private enterprises to enter the field of sewage treatment in China. In the municipal water market, Kangda Environmental Protection has grown into a top private water enterprise after 20 years of deep ploughing, focusing on sewage treatment, including reclaimed water treatment, water supply, sludge disposal and other businesses. In recent years, the company has seized the opportunity of the rapid landing of the PPP project, actively transformed, obtained PPP project orders, layout water environment comprehensive treatment and rural sewage treatment. It is expected that in the future, in addition to the rapid development of the company in the traditional water field, the PPP project of comprehensive water environment management and rural water governance will also be the focus of the company's business layout, driving the company's future performance growth.

Urban water business has maintained rapid development. By the end of 2016, the company had signed 96 projects by franchise, including 90 sewage treatment plants, 2 water supply plants, 3 sludge treatment plants and 1 reclaimed water treatment plant, with a total design treatment capacity of 3.363 million tons per day. The company's urban water business is mainly distributed in Shandong and Henan, and covers more than ten provinces such as Anhui, Heilongjiang, Jiangsu and Guangdong, mainly in second-and third-tier cities, so the project single processing capacity belongs to small and medium-sized. The company's average project handling capacity is 36000 tons / day, which is lower than the national average. The company has strong project operation ability, the average utilization rate of sewage treatment projects is 85%, and the plate gross profit margin is 46.3%. The discharge standard of about 80% of the projects is Grade 1 A standard, and the average sewage treatment fee is RMB1.32 yuan / ton. By the end of May 2017, the company has signed a contracted capacity of 3.969 million tons / day for urban water services, 2.559 million tons / day for operating projects, 775000 tons / day for projects under construction and 635000 tons / day for projects under construction. In the first five months, the company's newly signed urban water orders have reached 606000 tons / day, and we expect new orders for the whole year to exceed 1 million tons / day. The rapid growth of new orders is expected to boost the construction and operation income of the urban water sector.

Promote transformation, seize the opportunity of rapid promotion of PPP, and enter the field of water environment treatment and rural sewage treatment.

The Chinese government has vigorously promoted the PPP model in the field of public infrastructure since 2014. after several years of practice and promotion and the gradual landing of supporting policies, the landing speed of PPP projects has been gradually accelerated. In the PPP project library of the Ministry of Finance, environmental protection projects account for 16%. PPP model is reshaping the development of environmental protection water industry in the future. Kangda Environmental Protection actively promote the transformation, seize the opportunity of PPP rapid promotion, and actively strive for the distribution of water environment comprehensive treatment and rural sewage treatment PPP project orders. Establish strategic alliance outside the company: set up a joint venture with Zhongyuan Capital Management under Henan Provincial Finance Department and Jiangxi Water Investment under Jiangxi Provincial Government, and jointly acquire projects with state-owned background partners to open up advantageous regional markets; set up a joint venture with China Shipbuilding heavy Industry, a central enterprise with the world's leading water environment treatment technology, to introduce advanced technology. Since the transformation, a number of orders for comprehensive water environment treatment and rural sewage treatment projects have been successfully signed. including: urban water supply and drainage in Rushan, Shandong Province, water environment treatment in Tanghe River Basin in Hebi, Henan Province, water environment treatment in Fuzhou River Basin in Jiangxi Province, Yunan domestic sewage treatment project in Guangdong, Jiaoling domestic sewage treatment project in Guangdong, etc., with an investment of 8.08 billion yuan, some projects have started and contributed construction profits for the company in 2016. However, for the large-scale PPP project with an investment of several billion yuan, the implementation process involves all parties in the consortium's bid, and the coordination time is long, which may cause the project to start later than expected.

Investment advice: the company's revenue rose 4.9% year-on-year to 1.93 billion yuan in 2016, and net profit increased 3.4% to 335 million yuan. According to Bloomberg's consensus forecast, the company's net profit rose 30 per cent year-on-year to 434 million yuan in 2017. We believe that the newly signed orders and projects under construction of the company's urban sewage business are growing rapidly, there are fewer new PPP projects started in the first half of the year, and the construction revenue of PPP projects in the first half of the year is lower than previously expected by the market, but with the new construction of the Fuzhou project in Jiangxi Province, the PPP project will form favorable support for the company's construction profit growth throughout the year. We believe that Bloomberg consensus expectations can still be met. At the current price of HK $1.61, the company has a market capitalization of HK $3.33 billion and a forecast PE6.7 of 2017 times, which is very low in the Hong Kong listed environmental protection industry. At the same time, the company's profit growth is expected to reach 30%. We believe that the stock price has room for upside.

Risk tips: PPP project start-up progress is slower than expected; new PPP project orders are slower than expected; impairment provision for receivables.