In the first three quarters of 2017, Fuchun Environmental Protection achieved attributable net profit of 248 million yuan, an increase of 37.3% over the previous year. Net profit attributable after deductions was 243 million yuan, an increase of 43.3% over the previous year. The company's three-quarter report, the month-on-month slowdown in performance growth is mainly due to short-term effects such as environmental inspections and rising raw material prices. It is expected that industrial parks with stricter environmental protection will lead to a relatively rapid increase in the company's performance over the long term. We maintain our 2017 and 2018 performance forecasts of 4.0 million and 590 million, corresponding valuations of 23.5 and 15.9 times PE for 17 and 18, respectively, and maintain the “Highly Recommended - A” rating. Event: Fuchun Environmental Protection released its 2017 three-quarter report on the evening of October 22. In the first three quarters of 2017, the company achieved operating income of 2,476 billion yuan, an increase of 32.98% over the previous year; realized net profit attributable to shareholders of listed companies of 248 million yuan, an increase of 37.3% over the previous year; and net profit attributable to shareholders of listed companies was 243 million yuan, an increase of 43.29% over the previous year. The results were in line with the expected operating results for January-September 2017 at the time the semi-annual report was published. At the same time, the company announced a forecast range of operating results for 2017, which is a year-on-year increase of 30%-60%, and the corresponding attributable net profit range is 318 million yuan to 392 million yuan. If it takes the middle line, it is 355 million yuan, then the annual growth rate is 45%. The corresponding valuation under current stock prices is 26 times that of '17. Comment: 1. The estimated annual performance range is 318-392 million yuan, the middle line is 355 million yuan, corresponding to a growth rate of 45%, corresponding to the 2017 annual valuation of 26.4 times PE. In the first three quarters of 2017, the company achieved operating income of 2,476 billion yuan, an increase of 32.98% over the previous year; realized net profit attributable to shareholders of listed companies of 248 million yuan, an increase of 37.3% over the previous year; net profit attributable to shareholders of listed companies was 243 million yuan, up 43.29% year on year. The company's expected operating performance for 2017 is a year-on-year increase of 30%-60%, the corresponding attributable net profit range is 318 million yuan to 392 million yuan, and if the middle line is taken, it is 355 million yuan, an increase of 45% over the previous year. Based on the closing price on October 20, the corresponding 17-year valuation is 26.4 times PE; we expect the 2018 performance to be 590 million yuan, then the year-on-year growth rate corresponding to the company's expected mid-term performance of 355 million yuan in 2017 is 66%, and the corresponding 18-year valuation is 15.9 times PE. Our performance forecasts for 2017 and 2018 remain unchanged at 40,000 and 590 million yuan, with corresponding growth rates of 63% and 48%. The corresponding annual and one-year valuations are 23.5 and 15.9 times PE, respectively. It can be seen that the company's performance has maintained a high growth rate this year, and certainty has strengthened. Under the company's high performance growth rate, the company's valuation level is clearly low. 2. Our performance forecast for 2017-2018 remained unchanged at 4.0 million and 590 million yuan because the impact of the decline in single-quarter performance in the third quarter was a short-term impact. The company's high growth was due to endogenous growth in the park, and the normalization of environmental inspections and stricter environmental protection brought more space and long-term demand growth to each park. Judging from the growth rate of net profit attributable to shareholders of listed companies in the first three quarters of 2017, the company achieved net profit attributable to shareholders of listed companies of 248 million yuan in the first three quarters of 2017, an increase of 37.3% over the same period. A sharp drop of 61.47%. Looking at a single quarter, the company achieved operating income of 769 million yuan in the third quarter, significantly lower than the 793 million yuan and 914 million yuan in the first and second quarters; the net profit attributable in the third quarter was 49.84 million yuan, significantly lower than the 8098 and 117.54 million yuan in the first and second quarters. The decline in performance in the first three quarters of 2017 was mainly due to a decrease in gross margin due to rising raw material prices in the third quarter and a reduction in gas consumption by enterprises in the park due to environmental inspections. However, these adverse factors are expected to be eliminated in the fourth quarter, the high growth in gas demand for park enterprises will resume, and the company will return to the path of rapid growth in revenue and profit. Furthermore, environmental inspection brings more space and is conducive to long-term growth. Affected by the rise in raw materials, the company's gross margin declined in the third quarter. The company's consolidated gross margin for the first three quarters was 19.5%, a slight decrease of 1.7PCT from the 21.2% comprehensive gross profit margin for the first half of the year revealed in the semi-annual report. The decline in gross margin was mainly due to a slight increase in the price of coal, which accounts for about 80% of thermal power production costs, in the third quarter and remained at a high level. Although the company's cogeneration business has a coal-thermal linkage mechanism, the hot spot linkage mechanism has a certain lag and cannot respond in a timely manner when coal prices rise; second, in theory, the coal-thermal linkage mechanism can only cover changes in heating costs due to fluctuations in coal prices. Since the electricity price of the power generation part in cogeneration is stable, the coal-thermal linkage mechanism does not cover changes in power generation costs due to changes in coal prices. The price of coal is currently at a high point, and the probability that it will decline in the future will increase, and the company's overall gross margin level is also expected to rise accordingly. The environmental inspection had a big impact on the park's gas consumption in the third quarter. It is expected that high growth will resume in the fourth quarter. The central environmental inspection team will enter Zhejiang in mid-August. The enterprises in the company's relevant parks need to reduce their load before inspection. Therefore, it had a certain adverse impact on the company's single-quarter thermal power demand in the third quarter. However, most of the enterprises in the park are large and profitable enterprises in the industry. They are also capable and willing to cooperate with environmental inspection requirements to carry out rapid rectification. As the affected enterprises quickly rectify and resume production, the impact of environmental inspection is expected to be eliminated by the fourth quarter, the amount of gas used will also return A normal rapid growth trajectory. The company achieved attributable net profit of 8098 and 117.54 million yuan in the first and second quarters, showing a clear growing trend. After the factors influencing environmental inspection were eliminated in the fourth quarter, the net profit achieved in the fourth quarter should also be above 100 million yuan. At the same time, in the third quarter, due to the impact of environmental inspections, some enterprises delayed production demand, bringing additional growth in addition to the normal increase in gas use in the fourth quarter. Therefore, we judge that the company's annual performance should be close to the upper limit of the company's annual forecast range. Normalization of environmental protection inspections and stricter environmental protection have brought more space to various parks and long-term demand growth. Under the trend of stricter environmental protection, a large number of enterprises outside the park that do not meet environmental standards, and the regions in which they are located restrict the development of high-polluting industries have a trend of being forcibly shut down and relocated, while the enterprises in the national and provincial industrial parks corresponding to Fuchun's major environmental protection bases are relatively large. Environmental protection requirements are more stringent. Not only are they less affected by stricter environmental protection, but in the long run, they will also benefit from the relaxed competitive environment within the industry brought about by industry integration. Load increases and production expansion are significant Probabilistic events; at the same time, since industrial parks have supporting environmental protection facilities such as centralized sewage treatment, etc., the level of environmental protection is high, and affected enterprises outside the park are more willing to enter the park in order to maintain normal production, so industrial parkization has become a trend. The increase in the load and production of existing enterprises in the park, as well as the increase in the number of enterprises due to the entry of enterprises outside the park, are all conducive to the growth of the industrial park. As a supporting thermal power provider for the industrial park, Fuchun Environmental Protection has benefited from this. The long-term space is larger, the growth is higher, and the certainty is stronger. After continuing to divest marginal businesses such as coal trade, the company's current contribution to revenue and profit growth is mainly due to the endogenous growth of the thermal power business in various parks. Since Changan New Energy, which was newly acquired by the company in 2017, has not yet contributed a large amount of profit, and the Jiangsu thermal power project has not been fully put into operation since the end of 2016, the net profit growth of the company's thermal power business since this year, in addition to some of the steam price increases at Fuyang headquarters, Qingyuan Ecology, Donggang Thermal Power, and Xingang Thermal Power, etc., has mainly come from endogenous growth in bases such as Fuyang headquarters, Qingyuan Ecology, Donggang Thermal Power, and Xingang Thermal Power. Figure 1 shows the increase in net profit attributable to the company's various bases in 2013-2018. Under the general trend of stricter environmental protection, the company's growth rate will maintain a high level in the future. 3. Additional fund-raising projects include external mergers and acquisitions, base expansion, and technological upgrading. The additional distribution conference is of great significance to the company's future sustainable development. On September 28, 2017, Fuchun Environmental's application for a non-public offering of A-shares was approved by the Securities Regulatory Commission. The number of non-public shares issued does not exceed 20% of the company's total share capital before the current non-public offering, that is, no more than 159 million shares, and the total amount of capital raised does not exceed 920 million yuan. The projects invested after deducting issuance fees are shown in Table 1. It can be seen that the fund-raising project will not only directly promote the company's revenue and profit growth, but also ensure that environmental protection requirements are met and efficiency is improved to promote long-term stable development. At the same time, before the capital raised is in place, the company will invest in its own capital, bank loans, etc. in advance according to the actual situation of the project progress, and replace it after the capital raised is in place. The smooth progress of this non-public offering will help release the company's financial pressure. Obtaining approval from the Securities Regulatory Commission indicates that the dust on a smooth distribution has settled, and it is only a matter of time before the dust settles. 4. Profit forecast and investment recommendations At present, the actual usage area of the industrial parks corresponding to each major base in Fuchun is still less than 1/5 of the total area, and there is huge room for subsequent endogenous growth. Furthermore, all of the company's major bases have achieved ultra-clean flue gas emissions, and bases such as Xingang Thermal Power, Donggang Thermal Power, Jiangsu Thermal Power, and Chang'an Energy all have expansion plans, all of which provide a guarantee for the park's endogenous growth. Under the trend of continuous environmental pressure, industrial parkization has become a trend. Enterprises outside the park are restricted from developing and being forcibly relocated due to poor environmental protection standards. This not only helps the existing enterprises in the park to increase their load and even expand production, but also promotes a rapid increase in the number of enterprises entering the park, all of which are conducive to the long-term endogenous growth of industrial parks. Furthermore, the company currently has a low debt ratio and plenty of cash on hand. This non-public offering will also greatly release the company's financial pressure, help the company advance its strategy of continuing to extend acquisitions, and there is broad scope for future acquisitions to increase performance. We expect the company's net profit for 17-18 to be 40,000 to 590 million yuan. If we calculate the closing price on October 20, the company's market value is 9.4 billion yuan, and the corresponding PE valuation is at a low level. The company sees a target market value of 12 billion dollars in the short term and a target market value of 15 billion and 20 billion dollars in the medium and long term, maintaining a “Highly Recommended - A” rating. 5. Risks suggest that the progress of putting new projects into production is slow; the rise in coal prices has led to a decline in gross margin; and the risk that the non-public offering will not be successfully issued in the end.