Main points of investment
Event: on August 26, the company released its semi-annual report 2016. During the reporting period, the company achieved an operating income of 856 million yuan, an increase of 127.72% over the same period last year, and a net profit of 120 million yuan, an increase of 240.44% over the same period last year. The company has obvious advantages as a comprehensive service provider of environmental governance, and its performance has achieved rapid growth.
The merger of Zhongyi Ecology has brought a high increase in performance: the company completed the acquisition of Zhongyi Ecology in 2015 and realized the merger in the first half of 2016. Zhongyi Ecology brought the company 480 million yuan in revenue, accounting for 56.13% of the total revenue and 93.68 million of the net profit, accounting for 78% of the net profit. Affected by the downward pressure of the economy, the company's traditional business-filter press business expansion is relatively slow, sales revenue fell 38.24% in the first half of the year. However, due to the ecological performance commitment of Zhongyi, the profits of 115 million and 144 million yuan in 16 and 17 years respectively, the downside of the filter press business in the future will bring little risk of performance decline.
The comprehensive service provider for water environment management has a competitive advantage in the PPP project: the acquisition and merger of Zhongyi Ecology not only contributes to the performance, but also has greater strategic significance in realizing the closed loop of comprehensive treatment of water conservancy, thus transforming the company from a single manufacturer and seller of filter press equipment to an integrated service provider for water environment management. Since March 2014, the company has successfully acquired 6 environmental protection enterprises. business areas have covered sludge treatment and disposal, water conservancy dredging and dike projects, municipal sewage treatment, industrial wastewater treatment, rural domestic sewage treatment, ecological engineering construction, water quality monitoring and intelligent environmental protection and other fields. Successful layout of ecological engineering in the field of construction, landscape design and construction, the improvement of the industrial chain makes the company has a great advantage in the bidding of PPP project. Since 2015, the contract amount of PPP project signed by the company is about 10 billion yuan, covering the fields of sewage treatment plant, ecological engineering design and construction, regional overall water environment renovation, river basin management and so on. As of May 2016, the first phase of the PPP project in Wuxing District has been close to Song Gong, the Zhaoan County Project and the Zhelin Lake Project in Jiujiang City have started construction, and other projects will also be launched one after another, which will bring continuous growth of construction income and operating income for the company. Under the background of PPP booming in the field of environmental protection, the company has a strong ability to take orders, and its future performance growth is guaranteed.
The sludge industry is ready to start, and the company's filter press business will benefit: sludge, the core problem of sewage treatment in China, has not yet been effectively solved. At present, the annual output of sludge in China is about 70 million tons, including 35 million tons of municipal sludge and 35 million tons of industrial sludge, but nearly 50 per cent of the municipal sludge has not been treated innocuously by the end of 2014, far below the planned target of 80 per cent. We believe that during the 13th five-year Plan period, there will be industrial policy guidelines for sludge disposal, and improvements will be made in the price mechanism and profit model, and the matching of policies and funds will promote the start-up of the sludge industry. The company leads the country in the scale of filter press business, although it has declined after 2015 due to the downward pressure of the economy and the vigorous development of other businesses of the company, but the company has capacity reserves of filter press, which is expected to reach an inflection point driven by the sludge industry in the future and stabilize and pick up.
Investment advice: we expect the company to earn 0.79 yuan, 1.14 yuan and 1.43 yuan per share from 2016 to 2018, respectively. The six-month target price is 46.42 yuan, equivalent to a dynamic price-to-earnings ratio of 40.7 times in 2017.
Risk tips: integration risk, filter press market risk
