Investment advice:

We estimate that the EPS of the company from 2017 to 2019 is 0.34,0.35 and 0.44 yuan respectively. The current stock price corresponds to the PE of 37.5X, 36.3X and 28.9X in 17-19 years. Considering the steady growth of the company's sewage treatment sector and winning large PPP orders one after another, while the growth of hazardous waste and new energy supply business is better, it is expected to become a new profit bright spot, we maintain the "recommended" rating.

The performance of the sewage treatment sector is sound, and the growth of hazardous waste and new energy supply business is good:

The scope of 600874.SH water business is mainly traditional sewage treatment, tap water supply and reclaimed water business, extending to the industrial chain of water environmental protection industry, including industrial wastewater treatment, sludge treatment, solid waste treatment, and sales of environmental protection research products and services led by deodorization system. The proportion of revenue and gross profit of the company's sewage treatment business are both ~ 70%, which is the most important source of the company's performance. Sewage treatment, water supply and new energy cooling and heating business is mainly based on PPP mode, with a large demand for funds. As a platform of listed companies and local state-owned enterprises in Tianjin, the company has a good relationship between government and enterprises, low financing costs and steady growth in performance. The company has a long-term foothold in the field of sewage treatment, with rich operation experience, stable team structure and strong competitive advantage, which lays a good foundation for expanding the business field outside Tianjin. In 2017, Q1-Q3, the company achieved a revenue of 1.55 billion yuan (+ 4.55%) and a net profit of 410 million yuan (+ 11.82%). The increase in net profit was mainly due to the increase in sewage treatment revenue and the reduction of financial expenses. Overall, the company's sewage treatment business performance is sound, can provide sufficient cash flow, hazardous waste and new energy supply business prospects are bright, growth is good.

Sewage treatment has successively won large PPP orders, and entered the operation period in 2019:

At the end of H1 in 2017, the total scale of the company's water business reached 5.04 million cubic meters per day, including 3.93 million cubic meters per day for sewage treatment under PPP mode, 670000 cubic meters per day for sewage treatment under commissioned operation mode, 200000 cubic meters per day for tap water and 240000 cubic meters per day for reclaimed water. In July 2017, the company won the bid for the integrated PPP project of sewage treatment reclaimed water reuse and water supply in Bayannur City, including sewage treatment scale of 150000 cubic meters per day, reclaimed water scale of 115000 cubic meters per day, and water supply plant of 85000 cubic meters per day. In October 2017, the company won the bid for sewage treatment and reuse project in Ningxiang Economic and technological Development Zone, with a total scale of 50,000 cubic meters per day. Projects such as Bayannur City and Ningxiang City are expected to be put into operation by the end of 2018. In addition, the expansion and bid raising project of Beicang sewage treatment plant will increase the treatment capacity by 50,000 m3 / d and upgrade the existing sewage treatment plant by 100000 m3 / d, while the expansion and bid raising project of Jingu sewage treatment plant will increase the treatment capacity by 100,000 m3 / d and upgrade the existing sewage treatment plant by 550000 m3 / d. It is expected that Beicang, Jingu and other projects will be put into operation around 2019. After the bid raising and transformation of Beicang and Jingu project is completed, the cost of sewage treatment is expected to rise and thicken the performance of the company.

Join hands with Dalian Dongtai to lay out the dangerous waste industry with high scenery and bearing, and the performance release is expected:

The company has laid out Shandong Linyi, Tancheng hazardous waste comprehensive disposal center project, Linyi, Tancheng these two hazardous waste scale are 40,000 tons / year. At present, Linyi and Tancheng hazardous waste projects are in the early construction stage, with a construction period of 1-2 years, which is expected to be put into operation by the end of 2018 and deal with all kinds of chemical wastewater and other hazardous wastes in the park. In November 2017, the company also reached a strategic cooperation agreement with Dalian Dongtai to introduce Dalian Dongtai as a strategic investor in Shandong Entrepreneurship Environmental Protection Company. Dalian Dongtai, founded in 1991, is an early domestic enterprise engaged in solid waste treatment and organic waste treatment, with rich experience in solid waste disposal technology and management. The capacity gap of hazardous waste industry is huge, and there are high qualifications, technology and capital barriers in the industry, so it is difficult to alleviate the shortage of hazardous waste disposal capacity in the short term, the industry is more prosperous and profitable. The company, together with Dalian Dongtai, will continue to open up the business space of the hazardous waste plate and open up new profit bright spots.

The conversion of coal to gas has encountered the bottleneck of natural gas supply, and the prospect of new energy cooling and heating business continues to improve:

The company's new energy business takes Tianjin Jiayuan Innovation Energy Technology Co., Ltd. as the platform to provide customers with cooling and heating services with shallow, deep geothermal and other clean energy. In 2011, it won the bid for the franchise project of the energy station of Tianjin Cultural Center to start the new energy cooling and heating business. In 2014, it won the bid for the franchise project of Heiniucheng Road Energy Station, Tianjin Houtai Scenic spot No. 2 in 2015, and the energy station franchise project of Tianjin Binhai New area Cultural Center (Phase I) in 2016. The total service area of the company's new energy supply business is as high as 2 million square meters. The situation of air pollution in Beijing-Tianjin-Hebei region is serious, although the government vigorously promotes the conversion of coal to gas and electricity to alleviate the problem of haze in winter. However, the conversion from coal to gas is carried out too quickly, resulting in a serious shortage of natural gas supply. Entrepreneurial environmental protection new energy supply business uses renewable geothermal energy, the project input cost is mainly power cost, environmentally friendly, Tianjin and other places are actively promoting, and the performance prospect is good. Although, 2017H1, the company's new energy cooling and heating business income is only 29.197 million yuan, accounting for only 3.2% of revenue. However, with the fixed increase project put into operation, and the vigorous promotion of the company's new energy supply business, new energy supply business will become an important profit focus of the company.

The fixed increase funds are expected to be in place in the near future, and the financial expense rate is expected to be further reduced:

Since 2012, the company's gross profit margin has been stable at around 40-43%. However, the net interest rate increased from 16.8% in 2012 to 28% of 2017Q3, mainly due to the reduction in the rate of financial expenses. The company's financial expense rate fell from 13% in 2012 to 5% in 2017. In December 2017, the company's fixed increase project passed the examination and approval of the Securities Regulatory Commission, and the proposed investment will not exceed 1.84 billion yuan. It is expected that the company will be able to raise additional funds in the first half of 2018, which will replace the bank loans spent on the project raised by the company, and the company's financial expense rate is expected to continue to reduce. In addition, the approved quota of start-up environmental protection corporate bonds is 1.8 billion, and the first issue is only 700 million. If corporate bonds are issued later, the stock loan interest rate will be adjusted, the company's financial expense rate will be reduced, and the net interest rate will be raised.

Risk hint: the bid raising and transformation process of Beicang and Jingu projects is not as expected as expected; the expansion of hazardous waste business is not as expected as expected; the promotion process of new energy supply business is not as expected as expected; interest rates are rising sharply, and the company has encountered financing difficulties in carrying out PPP projects.