Main points of investment

~ event: the company issued a semi-annual performance forecast for 2017, which is expected to achieve a net profit of 24.24 million yuan to 31.51 million yuan belonging to shareholders, an increase of 100% to 130% over the same period last year. In addition, the company plans to set up an industrial investment fund jointly with Zhongtao Financial Control. In this regard, our comments are as follows:

Invigorate assets light, performance greatly increased compared with the same period last year. The company estimates that the impact of non-recurring profit and loss on the net profit of shareholders is 21.22 million yuan ~ 26 million yuan, which is the main reason for the year-on-year growth. Non-recurring gains and losses mainly come from the parent company invigorating assets and disposing of idle assets, which greatly increases the profits from the disposal of fixed assets. According to the information disclosed in the first quarterly report, the company realized non-operating income of 32.5237 million yuan in the first quarter due to invigorating assets and disposing of leased real estate, which is equivalent to the impact of non-recurrent profit and loss on the net profit of shareholders. We speculate that the disposal of fixed assets in the first quarter is still the main cause of non-recurring gains and losses in the first half of the year. Tianjin Fengli divested its 100% stake in Xinjiang Junchuang, which has seen a sharp decline in operating performance and profitability, after Tianjin Fengli completed the acquisition of 91.96% stake in Jiereng Technology, the company's controlling shareholder, in June 2016. Since the beginning of this year, the company has further disposed of idle assets, packed light, and focused on the booming environmental protection business. Except for recurrent profit and loss, the increase in revenue from the parent company's energy-saving ignition business and the significant reduction in financial expenses also contributed to the growth of net profit.

The acquisition will always maintain environmental protection and add dangerous waste to the new territory. Recently, the company signed an "Asset purchase Agreement" to complete the acquisition of 100% equity in Yongbao Environmental Protection in two transactions: this transaction plans to purchase 70% equity stake in Yongbao Environmental Protection with 385 million yuan of its own funds, and the remaining 30% equity will be completed in 2019. Yongbao Environmental Protection is a company specializing in harmless disposal, comprehensive utilization and water pollution treatment of hazardous wastes. It has formed a product line of a series of comprehensive utilization products of hazardous waste resources, including polyaluminum chloride products, high-efficiency composite coagulants, polyferric chloride products, defluorination agents, etc., with a total qualification of 185,000 tons per year. The other side of the transaction promised that the deduction of non-net profit of environmental protection in 2017 and 2018 would not be less than 45 million yuan or 55 million yuan, corresponding to a valuation of only 12 times in 2017. From January to May 2017, Yong Bao Environmental Protection achieved a net profit of 19.16 million yuan. At present, it is in good condition.

It is proposed to initiate the establishment of an industrial fund to speed up the building of a platform for comprehensive environmental management. The company has signed a strategic cooperation agreement with Zhongtao Financial Control, and the two sides intend to jointly initiate the establishment of an industrial investment fund. The total size of the fund is no more than 2 billion yuan, and the size of the first phase is 1 billion yuan. The investment direction of the fund is sewage treatment enterprises with stable cash flow and core technology, solid waste treatment enterprises, domestic waste cleaning, collection and transportation enterprises, and new construction or acquisition of hazardous waste projects.

Epitaxial M & An is an important means for the company to realize the transformation of environmental protection. The company has successively acquired Blue Sky Environmental Protection and Inrogren to realize the business layout in the field of flue gas treatment and water treatment. The acquisition of environmental protection will add a new waste business for the company. Through the way of industrial fund, the merger and acquisition of high-quality environmental protection enterprises and timely injection into listed companies can improve the efficiency of capital operation and accelerate the construction of a comprehensive environmental governance platform.

Intensive signing of strategic cooperation agreements, deep ploughing Henan water market. In June, the company signed three framework agreements in succession. Among them, Yexian comprehensive environmental management project has a total investment of 500 million yuan. The partners of the other two agreements, Henan Water Conservancy first Bureau and Henan Water Conservancy Investment Group, respectively belong to Henan Water Resources Department and Henan Provincial Government, and the cooperation involves water conservancy, urban water affairs and water resources extension industry, sponge city and other construction projects in Henan Province. The cooperation period between the company and Henan Water Conservancy Investment Group is 30 years, and the investment amount of the project is 20 billion yuan. In cooperation with local state-owned enterprises in Henan Province, the company has been able to deeply participate in the water market in Henan Province and greatly enhanced its ability to obtain orders.

New shareholders increase their holdings with high standards, and equity incentives show confidence. After the change of the actual controller, the company made a deep adjustment to the management, and awarded 1268 million stock options to the core personnel of Dong, Jian and Qiao. The conditions for exercising the right are: the net profit in 2017 and 2018 is not less than 150 million and 185 million. In April this year, the company further launched a high-standard plan to increase its holdings: chairman Mao Fengli and the company's directors, supervisors, and Gao plan to increase their holdings by 110 billion yuan per share, with a price ceiling of 15 yuan per share. The company's equity incentive sets higher conditions for exercising power, while high-standard management increases its holdings to demonstrate confidence in future development. The company's net profit increased significantly in the first half of 2017, the environmental protection business expanded smoothly, and the change began.

Investment advice: maintain the overweight rating! The company is expected to make a net profit of 160 million and 200 million from 2017 to 2018. The company currently has a market capitalization of 5.7 billion, with a corresponding valuation of 36 times and 29 times, respectively. The company's low-price acquisition of dangerous waste assets significantly increased performance, the establishment of an industrial fund is expected to speed up the pace of extension mergers and acquisitions, deep ploughing Henan water market waiting for the project to land, equity incentives and high-standard holdings plan to show confidence, increase the rating!

Risk hint: the project is behind schedule.