Summary of the report
Net profit rose 14.5% in the first half of 2017 compared with the same period last year. Yunnan Water Affairs announced its results for the first half of 2017 on August 25. Due to the continued expansion of the company's size, the company's revenue increased by 91% to 1.66 billion yuan, and gross profit increased by 48.9% to 410 million yuan compared with the same period last year, but due to the low gross profit margin of the new consolidated project, the company's overall gross profit margin decreased by about 7 percentage points compared with the same period last year. The company's profit for the period rose 74 per cent year-on-year to 156 million yuan, but net profit attributable to shareholders rose 14.4 per cent to 91.77 million yuan due to the issuance of 1.2 billion yuan of green sustainable bonds at the end of last year.
The company's processing capacity continues to expand and its competitive advantage in the industry continues to be solid. By the end of June, the company had 170 water projects (including 26 Olympian projects) and a design capacity of 4.824 million tons per day, an increase of 13.7 percent over the end of 2016. Among them, there are 112 sewage treatment projects with a scale of 2.712 million tons per day, and 58 water supply projects with a scale of 2.112 million tons per day. The company has 12 solid waste projects with a design capacity of 5186 tons per day, an increase of 40% over the end of 2016. The company's leading position in the industry has been further strengthened, and the business layout has been formed in more than 20 provinces and Southeast Asian markets.
Solid waste business sector performance is beautiful, is the performance bright spot. The company's early layout of solid waste projects, performance contribution shows. In the first half of the year, solid waste business revenue increased by 120% to 240 million yuan, GPM increased by 11.5% to 40.4%, and gross profit increased by 208% to 96.37 million yuan, making it the company's second-largest business segment after the sewage sector. There is still room for price increase in some large projects of solid waste business, as well as three projects under construction and two preparatory projects, namely Kunming Medical waste Project Phase II and Jinan Project Phase II. The company's solid waste business will maintain stable and rapid growth in the next two years.
Galaxy Newspring acquisition increases financial costs, and it takes time for project profits to be released. The company completed the full equity acquisition of Galaxy Newspring PTE in March, and the 24 projects of GNS have a processing scale of 1.54 million tons / day, of which 920000 tons / day have been put into operation, which makes a great contribution to the improvement of the company's volume. However, the efficiency of GNS project management needs to be improved, and there are some problems, such as personnel redundancy, water charges and compensation for some projects, and the gross profit margin of some projects is on the low side. As a result, the gross profit margin of the company's sewage and water supply division is obviously dragged down. After the company took over, it has disposed of 2 projects of mediocre quality, and carried out bid raising and renovation and raising water charges in a number of projects. We expect that the profit contribution of GNS projects will increase in the future, and there is a large potential space for bid raising and expansion of a number of potential projects, but it will take a certain time for profit release. It is expected that the profit contribution of GNS projects will gradually become significant after 1-2 years.
The company will adjust its development strategy, improve the profitability of projects on hand, and optimize acquisition projects. The scale of the company has expanded very rapidly after listing, in which the scale of water projects has reached about three times that of the listing, and has covered more than 20 provinces and Southeast Asian markets. The company's solid waste plate has also made a number of projects. With the rapid expansion in the early stage, the company's capital investment is larger, so the company's debt ratio increases rapidly. By the end of June, the company's net debt ratio had reached 141%, a high level in the industry.
In the first half of the year, the company's financial cost reached 216 million RMB, accounting for 53% of the operating profit. After the business scale reaches the leading level in the industry, the company adjusts its business strategy, strives to tap the profitability of projects on hand within 1-2 years, improves the profitability of potential projects such as GNS, broadens financing channels and reduces financial costs. Future project acquisitions will only choose very high-quality projects.
Investment suggestion: the company's net profit in 2016 was 388 million yuan RMB. In the first half of this year, the company's net profit increased by 14.5% compared with the same period last year. We initially estimate that the company's annual profit will increase by about 10%. The current market capitalization is 3.46 billion Hong Kong dollars, corresponding to 2017 PE6.7 times, which is medium among environmental protection stocks. The company will focus on improving the profitability of existing projects in the next 1-2 years. It is expected that the company's future growth will accelerate after the completion of management optimization.
Risk tips: under the environment of tight balance of domestic capital, the increase of the company's financial burden; the impairment risk of trade and other receivables; the progress of M & A project integration is slower than expected.