The company disclosed that its operating income in the first half of 2017 was 338 million yuan, an increase of 43.13% over the same period last year, and its net profit was 37.596 million yuan, an increase of 11.81% over the same period last year. Deducting the non-return net profit of 37.633 million yuan, an increase of 12.93% over the same period last year, the company's reported performance was in line with expectations. In the first half of 2017, the company's business as a whole improved, steadily contributing income, the subsidiary Sitong Environment began to consolidate in December 2016, and the net profit was-17800 yuan. At present, Sitong is in the period of business expansion, and its sales and management costs have increased. In addition, the financing scale of Sitong is still large, and the financial cost is relatively high. The revenue of the Sitong bid-winning project is relatively small in the first half of the year, and is expected to be recognized in the second half of the year.

The company lost 646000 yuan in the first quarter. In the second quarter alone, the company achieved operating income of 242 million yuan, an increase of 47.98% over the same period last year, and a net profit of 38.242 million yuan, an increase of 39.08% over the same period last year.

The consolidated gross margin was dragged down by operating services, the expense rate remained stable during the period, and the cash flow was further under pressure: the company's consolidated gross margin in the first half of 2017 was 41.99%, down 0.5 percentage points from the same period last year.

The company's comprehensive gross profit margin was dragged down by the decline in operating service gross profit margin. Due to the reduction of water intake from some operating projects, poor influent quality and rising pharmaceutical and labor costs, the company's operating service gross profit margin decreased by 14.65 percentage points to 39.97% compared with the same period last year. During the period of the company, the expense rate remained stable, and the company's sales expense rate and management expense rate were 9.68% and 12.26% respectively, down 0.42% and 1.09% respectively from the same period last year. The company's financial expense rate was 1.31%, up 1.64% from the same period last year, mainly due to the increase in loan interest expenses brought about by the Sitong environment and the balance sheet. The company's interest expenditure in the first half of the year was 4.27 million yuan, an increase of 27.87 times over the same period last year. The net operating cash flow of the company in the first half of the year was-9.4775 million yuan, a decrease of 89.32% compared with the same period last year. The cash flow was further under pressure, mainly due to the impact of the four links environment. By the end of June 2017, the company had accounts receivable of 430 million yuan, an increase of 16% over the beginning of the year, and inventory of 270 million yuan, an increase of 19.94% over the beginning of the year.

The continuous promotion of water treatment promotes the improvement of water treatment business, and the centrifuge business benefits from the upstream warming:

The company actively develops the water environment management business, benefiting from the ten water articles, the treatment of black and smelly water bodies and the promotion of the river head system. The company's water treatment business contributed business income of 136 million yuan, an increase of 54.98% over the same period last year, and a gross profit margin of 46.44%, an increase of 4.68% over the same period last year. The company's water governance business in the Yangtze River Delta region has achieved remarkable results, with a total of more than 85 million yuan in newly signed orders in the first half of the year. The technical consulting business of subsidiary Daoyuan Environment signed nearly 10 million yuan of new orders in the first half of the year. The company's operating services contributed 75.094 million yuan in operating income in the first half of the year, an increase of 20.93% over the same period last year. Benefiting from the recovery of the metallurgical and coal markets in the downstream industries of centrifuges, the market environment of centrifuges has improved, and the company has increased its sales efforts. The revenue contributed by the centrifuge business is 99.338 million yuan, an increase of 18.61 percent over the same period last year, with a gross profit margin of 35.38 percent, an increase of 3.14 percent over the same period last year. Jiangsu Huada, a subsidiary of the company's centrifuge plate, achieved an operating income of 103 million yuan and a net profit of 14.0914 million yuan.

The ability to take orders continues to improve: since 2015, through the acquisition of Jiangsu Huada, Sitong Environment, Daoyuan Environment and other companies to make up the qualifications, the company has formed a water treatment industry chain of consultation + design + equipment + engineering, which can well dock with large-scale projects. Shanghai Dadu assets holding company is expected to bring financial support and project resources for the company, and enhance the strength of the company to undertake PPP projects. In the first half of 2017, the company signed 6 new operating projects, including BOT2, BOO2 and PPP2, with a total investment of 147 million yuan, of which 75.779 million yuan was outstanding. The company currently has 27 projects in operation, contributing 70.319 million yuan in operating income in the first half of the year. The company has more orders on hand. By the end of June 2017, the total amount of orders on hand is 649 million yuan, ensuring the company's future performance, including 256 million yuan for complete sets of water treatment equipment and supporting facilities, 194 million yuan for operating services, 113 million yuan for centrifuges, and 85.75 million yuan for municipal sewage investment.

Equity incentive, corporate interest synergy with executives: according to the company's adjusted 2017 restricted stock incentive plan, the company plans to grant 5.063 million restricted shares to senior executives and core employees, which will be completed for the first time in May at a price of 13.99 yuan per share. For the first time, the assessment standard for the lifting of restrictions on the sale of shares is that the non-deduction net profit of 2017-2019 increases by no less than 30,70 and 110 per cent respectively compared with the 2016 level, that is, the company's non-return net profit from 2017 to 2019 is not less than 80.2 million yuan, 105 million yuan and 130 million yuan, respectively. The interests of the company and the interests of senior executives coordinate to mobilize the enthusiasm of employees.

Investment suggestion: the company is the pioneer of magnetic separation technology, the company's magnetic separation technology has unique technical advantages such as quick effect, small area and small investment, and has a broad space to promote in the treatment of Heidi River. With the promotion of the ten water lines, the river head system, and the treatment of the black smelly river, the "water ten articles" put forward that "the built areas of municipalities directly under the Central Government, provincial capitals, and cities separately listed on the plan should basically eliminate the black and smelly water body by the end of 2017." the demand for the treatment of the black smelly river is expected to gradually lead to the release of the company's performance. We estimate that the EPS of the company from 2017 to 2019 is 0.36,0.46 and 0.56 yuan respectively, corresponding to PE of 32.1x, 24.8x and 20.3x, maintaining the "buy-A rating" and the 6-month target price of 14 yuan.

Risk hint: project promotion is not as expected, M & An integration is not as expected.