Main points of investment:

The company's 2017 mid-year report was disclosed. In the first half of 2017, the company achieved operating income of 589 million yuan, an increase of 2.62% over the same period last year, and the net profit belonging to shareholders of listed companies was 153 million yuan, down 10.76% from the same period last year.

Income has increased steadily, gross profit margin has declined and the rate of management expenses has increased. In the first half of 2017, the operating income of Jiangnan Water reached 589 million yuan, an increase of 2.62% over the same period last year. Of this total, tap water revenue was 235 million yuan, down 0.02% from the same period last year, and engineering installation revenue was 371 million yuan, an increase of 3.88% over the same period last year. The increase in revenue is mainly due to the growth of engineering installation business. The comprehensive gross profit margin was 48.34%, down 5.12 percentage points from the same period last year, mainly due to the large increase in business costs and the decline in gross profit margin. According to the gross profit margin of sub-business, the gross profit margin of tap water decreased 2.04pct compared with the same period last year, mainly due to the increase in depreciation, consumption of raw materials and materials, and the salary of workers compared with the same period last year; the gross profit margin of engineering installation decreased 7.76pct compared with the same period last year, mainly due to the increase in engineering installation costs. The company's sales expenses increased by 2.69% compared with the same period last year, and the sales expense rate was flat. Administrative expenses increased by 16.96% over the same period last year, and the rate of administrative expenses increased by 1.09pct compared with the same period last year. Financial expenses increased by 2.79% compared with the same period last year, and the rate of financial expenses was unchanged. The company's investment income was 8.11 million yuan, an increase of 67.11% over the same period last year. Non-operating income and expenditure was 1.5 million yuan, down 9.85% from the same period last year, due to an increase in foreign donations. The income tax will be reduced by 10.64%, and the income tax rate will remain basically the same.

What to watch: the main focus in the future is to actively expand sewage treatment and solid waste business as a water leader in Jiangyin. Jiangyin water faucet. The company is the only enterprise engaged in water supply business in Jiangyin City, and the actual controller is Jiangyin City Public assets Management Company, with a total shareholding of 58.37%. The company is currently the only state-owned listing platform in Jiangyin City. The company's tap water business has four surface water plants in Xiaowan, Xiaoshan, Chengxi and Ligang, with a total design capacity of 1.16 million tons per day. At the same time, the municipal engineering company, a wholly-owned subsidiary, has the secondary qualification of general contracting for municipal public works construction, and is the only enterprise in Jiangyin that can independently undertake the installation and construction of large and medium-sized water pipes. Actively expand the business of sewage and solid waste. The company's sewage business is mainly carried out by the wholly-owned subsidiary Hengtong Company and the shareholding (30%) company Everbright Water (Jiangyin). Hengtong Company has jurisdiction over Nanzha and Huangtang sewage treatment plants with a scale of 35,000 tons per day. Everbright Water (Jiangyin) has jurisdiction over Binjiang, Shizhuang, Chengxi and Chengxi Phase II sewage treatment plants with a scale of 190,000 tons per day. In December 2015, the company set up a wholly-owned subsidiary, "Splendid Jiangnan", which is responsible for the construction of Jiangyin Qinwangshan industrial waste comprehensive utilization project (emergency line) and Jiangyin Qinwangshan industrial waste comprehensive utilization project (regular line), with a total investment of 550 million yuan. It is now advancing steadily.

Profit forecast and valuation. It is estimated that the company will achieve a net profit of 3.93 yuan and 509 million yuan, corresponding to EPS of 0.42 yuan and 0.54 yuan, respectively, belonging to the parent company in 2017. With reference to the valuation of the comparable company, the company was given a buy rating of 20 times PE in 2017, corresponding to the target price of 8.40 yuan.

Risk hint. (1) the progress of the company's waterworks upgrading and solid waste projects is lower than expected; (2) the price of tap water and sewage changes; (3) the cross-regional expansion of business is limited.