Main points of investment:

Event: the company released its annual report in 2017. the company achieved an operating income of 701 million yuan in 2017, an increase of 45.65% over the same period last year, and a net profit of 60.5104 million yuan belonging to the shareholders of the parent company, an increase of 23.43% over the same period last year.

The company is the domestic Roots fan faucet. In the past ten years, the company ranks first in the market share of Roots blower. With its stable performance and cost advantages, Roots blower is widely used in sewage treatment system engineering, desulphurization and denitrification system engineering, industrial intelligent control, municipal administration, park industrial lighting and other fields. In 2017, driven by water treatment, cement and other downstream industries, the company's fan product sales increased greatly. Of these, 8457 Roots fans were sold, up 36.49 percent from the same period last year, and 2022 slurry pumps were sold, up 71.65 percent from the same period last year. In terms of different industries, the company's revenue in the water treatment sector reached 160 million yuan, an increase of 44.95% over the same period last year, while that in the cement sector reached 79.48 million yuan, an increase of 74.26% over the same period last year.

Raw material costs and sales expenses suppress the company's profit performance to a certain extent. The company's operating cost in 2017 was 468 million yuan, an increase of 51.77% over the same period last year. From a split point of view, the cost of direct materials reached 256 million yuan, an increase of 56.74% over the same period last year; labor costs reached 18.98 million yuan, an increase of 39.01% over the same period last year; and manufacturing costs reached 33.9 million yuan, an increase of 21.35% over the same period last year. In terms of expenses, the company's sales expenses reached 62.0981 million yuan in 2017, an increase of 58.91% over the same period last year, mainly due to the increase in employee salary, travel, bidding fees and transportation expenses, while the management expenses were 92.4323 million yuan, an increase of 24.28% over the same period last year. Affected by the rise in material costs and expenses, the company's gross profit margin in 2017 was 33.20%, down 2.69 percentage points from the previous year. The company's net profit rate on sales was 9.86%, down 1.68 percentage points from the previous year.

The stricter environmental protection policy will help the company develop in the future. In the production process of water and gas treatment, the company's main products Roots fan, centrifugal blower, single-stage high-speed centrifugal blower, ventilator and other products play an important role. In recent years, the state has launched a strong atmospheric control policy. it affects the industries such as electric power flue gas desulfurization, boiler flue gas treatment of all industrial and mining enterprises (petrochemical, chemical, coal chemical, etc.), steel kiln flue gas treatment, coking flue gas treatment, cement kiln flue gas treatment and so on. The ultra-low emission standard of power plant boilers is expected to help the company develop rapidly before 2020 and contribute to the national SO2 and smoke (powder) emissions. In terms of water treatment, the company has developed rapidly in municipal water treatment, with the doubling of ZW series and ZG series fans and a significant increase in the number of customers.

Profit forecast and investment rating: we expect the company to achieve operating income of 862 million yuan, 1.026 billion yuan and 1.15 billion yuan respectively, net profit of 87 million yuan, 103 million yuan and 124 million yuan respectively, EPS of 0.28,0.33 yuan and 0.40 yuan respectively, corresponding PE of 30x, 25x and 20x respectively. As the leader of Roots fan in China, the company gives a reasonable valuation of 36 times in 2018, with a target price of 10.08 yuan. It is recommended to give a "recommended" rating for the first time.

Risk tips: 1, the implementation of environmental protection policies in the downstream industry is not as strong as expected; 2, the price of raw materials fluctuates sharply; 3, the financing cost increases significantly.