China dredging Environmental Protection (00871 HK), formerly known as Xiangyu dredging, changed its name on December 13 to better reflect its geography and business focus. The company expects that its revenue from environmental dredging business may account for about 50% of the company's revenue within 3-5 years, and is now less than 10%. The gross profit margin of environmental dredging (more than 60%) is much higher than that of traditional infrastructure and dredging (30% 40%). We expect that the company's overall gross profit margin will increase due to the increase in the contribution of the environmental dredging business.

The company issued HK $243 million of three-year convertible bonds (coupon 3 per cent and share price of HK $2.70) on October 28th to support capital expenditure on environmental dredging. The company plans to invest 500 million yuan to expand environmental dredging capacity from 1 million cubic meters to 7 million cubic meters in 2014 and possibly more than 10 million cubic meters by 2015 (more funds are needed). Although the company's current net debt ratio of only 26.0% is not high, we worry that tighter control of local debt will slow down the company's receivables and affect cash flow.

Maintain the company's earnings per share forecast of 0.277 yuan and 0.297 yuan for 13 to 14 years. And raised its 15-year earnings per share forecast by 5.3% to 0.353 yuan. Raise its target price to HK $2.85, corresponding to an annual price-to-earnings ratio of 8.0x / 7.4x / 6.2x and a growth rate of 0.7x in 13-14-15. Maintain "collection".