Aspects that are inconsistent with the forecast

Venture Environmental Protection announced in 2013 that the annual operating income was 1.75 billion yuan, up 6.9% from the same period last year; the net profit attributable to shareholders was 282 million yuan, up 4.8% from the same period last year; and earnings per share was 0.20 yuan, 5.5% lower than our forecast of 0.21 yuan.

Investment impact

Revenue rose slightly in 2013, but gross profit margin fell slightly. While the company's business revenue rose 6.9% in 2013, gross profit margin fell 2.3 percentage points to 39.6%.

Due to lower water prices and rising costs of new waterworks, we expect profits to fall by 11% in 2014. In February 2010, Entrepreneurship Environmental Protection signed BOT contracts with the Tianjin municipal government for four waterworks, and the water price will be reduced from 1.93 yuan / ton to 1.77 yuan / ton in 2014 (it will be 1.76 yuan / ton in 2015, which will be adjusted accordingly in 2016). As the relocation of the Jizhuangzi sewage treatment plant will implement a higher level A standard, the company's sewage cost should increase by less than 10 percent in 2014. In addition, the company expects to treat about 921 million cubic meters of sewage in 2014, 2 per cent lower than in 2013.

We maintain the neutral / sell rating of H shares / A shares. From 2014 to 2016, we lowered the company's gross profit forecast by 4.7% to 34.2%, from 5.0% to 5.3%, and from 2.3% to 0.18 / 0.18 to 0.20 yuan, respectively. Based on the EV/EBITDA approach, we adjust the 12-month target price of H-shares / A-shares of the company + 3.5% EBITDA 2.8% to 3.72 Hong Kong dollars / RMB 7.91, based on the latest H-share / A-share target multiple of 6.3 EBITDA 15.2 times to reflect the expected changes in EBITDA and net debt in 2014, and maintain the neutral / sell rating of H-shares / A-shares corresponding to 1.3% upside / 8.1% downside.

Upside risk: if the company resumes its national expansion, it may lead to business growth again; the integration of Beijing, Tianjin and Hebei may be conducive to the company's business development in Tianjin. Downside risk: if the cost of the company's new water plant is too high, it may make the company's performance lower than expected.