Events:

The company released its quarterly report for 2017. During the reporting period, the company's revenue and net profit were 787 million yuan and 91 million yuan respectively, an increase of 5.62% and 12.84% over the same period last year, which was lower than the expected growth rate of 30%.

Main points of investment:

The competition in the film market intensified, and revenue grew steadily during the reporting period, but the cost increased and the investment income decreased, and the performance was lower than expected. Although the expansion of the water purifier market has driven the demand for household membrane and the demand for industrial environmental protection has increased, competition in the membrane market has intensified, coupled with weak overseas demand. During the reporting period, the company grew steadily, with overall revenue up only 5.62%, while gross profit margin fell 2.63 percentage points. At the same time, the increase in interest-bearing bonds led to a sharp increase in financial costs by 179 per cent, coupled with a reduction in dividends from participating subsidiaries, a 8.55 million drop in investment income, a 4.15 million drop in government subsidies and a 10.36 per cent drop in the company's net profit. However, as a result of 16-year equity acquisitions of time Wharton and Nature, minority shareholder profit and loss increased by 21.92 million, resulting in a 12.84 per cent increase in net profit.

The first phase of the new Shawen RO film base has been put into production, the construction of the second phase has started, and the follow-up production capacity will still be increased. The company's RO membrane production capacity is about 8 million square meters in 2015. at the end of 2015, Shawen base has built two new membrane production lines, RO membrane 6 million square meters, ultrafiltration membrane 3 million square meters, the first phase has reached full production. Membrane technology is the main direction of water treatment, the current nanofiltration membrane and plate ultrafiltration membrane are still mainly imported, the company expects to increase sales by virtue of cost advantage in the future, the second phase will build a new nanofiltration membrane 4.8 million square meters, plate ultrafiltration membrane 1 million square meters production line, the construction period of two years, has been started, is expected to reach production in 2020, when the company's production capacity will be further increased.

With equal emphasis on endogenesis and extension, we have participated in the engineering company and will gradually achieve the strategic goal of extending the company to the vertical and horizontal field of water treatment in the future. The company's strategic positioning is clear, and the pace of extension will be accelerated while ensuring endogenous growth, including: upstream membrane materials; downstream water treatment projects, especially special sewage treatment projects with high-tech threshold, or downstream projects that pave the way for the development of special membrane products market; water operating assets with good cash flow, low collection risk and technical threshold. In addition, the field of hazardous waste is also an area that the company is optimistic about and actively looking for. After the company's equity is transferred to CRRC, the decision-making chain is shortened, which is of great help to the extension M & A strategy, and the company is provided with 240 million low-interest loans with an interest rate of less than 3%, which will further benefit the development of the company. Sign PE outsourcing agreement to speed up the pace of epitaxial mergers and acquisitions. The company signed the Financial consultant Cooperation Agreement with Yuhua on March 30, 2017, stipulating that it will provide the company with no less than 10 target companies that meet the relevant requirements for environmentally friendly water treatment every year, among which there are not less than 4 target companies with revenue of more than 500 million yuan. It will help to improve the efficiency of M & A project search and accelerate the pace of epitaxial M & A, which is in line with the company's overall development strategy. During the reporting period, the company participated in Huitong Environmental Protection Company, established a cooperative relationship with the green environmental protection team, and initially involved in the field of water treatment engineering, in order to promote strategic coordination with the company's membrane material research and development and application.

Investment rating and valuation: considering the growth rate of downstream demand, we downgrade the company's 17-19 return net profit to 1.2,1.46 and 175 million respectively (originally 1.29,1.71,215 million). The current stock price corresponds to 43 times of 17-year PE, maintaining the "overweight" rating and looking forward to the landing of the company's extension expansion.