Events:
The company issued an announcement on the evening of December 26: 1) the company signed the "termination and compensation Agreement of Wangxinzhuang sewage treatment franchise Agreement" with Zhengzhou City Administration Bureau, the compensation price is 877.7224 million yuan; 2) the company and Zhihe Environmental Protection set up a joint venture company to jointly expand the market for upgrading the effluent quality of the sewage treatment plant. In this regard, our comments are as follows:
Main points of investment:
The government buyback of Wangxinzhuang sewage treatment plant is still commissioned by the company to compensate for the thickening performance of 878 million yuan.
Wangxinzhuang sewage treatment plant was put into operation in 2000, the sewage treatment scale is 400,000 m3 / d, and the effluent is secondary labeling. the company won the franchise of Wangxinzhuang sewage treatment plant for 25 years in 2006. Because of the bid raising and transformation of the Zhengzhou sewage treatment plant, according to the overall arrangement of Zhengzhou, from the first half of 2017, the Wangxinzhuang sewage treatment plant will gradually reduce the sewage treatment capacity and eventually shut down. The Zhengzhou City Administration Bureau signed the "termination and compensation Agreement of Wangxinzhuang sewage treatment franchise Agreement" and "Wangxinzhuang sewage treatment Plant Intermediate Water entrustment Operation Agreement" with the company, and the Urban Administration Bureau will pay 878 million yuan in compensation price. it will be included in the company's net profit as a non-recurrent profit and loss, which can significantly enhance the company's performance. In addition, in order to ensure the reclaimed water demand of customers, the Wangxinzhuang sewage treatment plant is still operated by the company, and the Municipal Administration Bureau needs to pay the corresponding operating expenses. As most of the sewage from the Wangxinzhuang sewage treatment plant decreased in 2017, only a small amount of reclaimed water has been in operation since the beginning of 2018, so the buyback will not have a major impact on the company's performance this year and next.
Set up a joint venture with Zhihe Environmental Protection to expand the bid raising and transformation market, and the industrial chain will continue to improve.
Zhihe Environmental Protection is a company committed to sewage treatment, with advanced anaerobic treatment of wastewater, removal of total nitrogen and removal of refractory substances. Rich engineering experience in petrochemical, coal chemical, fine chemical, antibiotic pharmaceuticals, traditional Chinese medicine, food and other fields. The company plans to establish a joint venture with Zhihe Environmental Protection Company to carry out technical development and application in the fields of urban water supply, sewage treatment, reclaimed water utilization and water environment treatment, and vigorously develop the business of upgrading and reforming the effluent quality of sewage treatment plants. With the improvement of environmental protection requirements and the continuous improvement of residents' living standards, sewage discharge standards are also gradually improving, and the corresponding standard raising and transformation market gives birth to great opportunities. According to the construction plan of urban sewage treatment and recycling facilities during the 13th five-year Plan, 43.2 billion yuan will be invested in upgrading sewage treatment facilities during the 13th five-year Plan period, and the market prospect is good. Recently, Henan Province issued the Henan Water pollution Prevention and Control regulations (revised draft), encouraging the upgrading of existing sewage treatment plants to meet surface water Ⅴ water quality standards, and the establishment of a joint venture company to expand sewage bid raising and transformation business, which is conducive to seizing market opportunities to obtain more orders, while enhancing the company's core competitiveness and new performance highlights.
Sufficient orders + expected injection of assets, regional environmental protection platform has entered a period of rapid development.
Based on urban sewage treatment and central heating, the company continues to expand the industrial chain, which has been extended to reclaimed water reuse, biogas utilization, construction waste, village sewage, watershed treatment, sludge treatment, photovoltaic and other fields. the company continues to improve the industrial chain to build a comprehensive environmental service provider, and shows a first-class ability to take orders. Since 2017, the company has won the bid for Xinmi, gully, Xinyang Hanhe, civil rights, Fangcheng, Nei Huang, Shangcai, Gongyi and other comprehensive environmental control projects, with a total investment of 11.19 billion yuan and sufficient orders on hand. In addition, the major shareholder Public Utilities Group has promised to inject Zhengzhou New District sewage treatment Plant (1 million tons / day) and Shuangqiao sewage treatment Plant (600,000 tons / day) into listed companies before December 31, 2019. In addition, major shareholders have garbage power generation, tap water business and other assets, do not rule out the possibility of injection into listed companies in the future. As the only state-owned environmental protection platform in Henan Province, the future order acquisition and asset injection are highly expected, and the company will enter a period of rapid development.
The price-to-book ratio is only 0.86, which has long-term investment value.
In the early stage, due to market reasons, coupled with the double-kill valuation performance of the environmental protection sector, the stock price fell more. The company's current price-to-book ratio is only 0.86, which is much lower than that of state-owned enterprises in the same industry (Xingrong Environment 1.16, Hongcheng Water Industry 1.25, Chongqing Water 1.88). We think the company is undervalued. As of 2018Q3, the company's asset-liability ratio is only 23.74%, which is also lower than that of its peers (Xingrong Environment 43.31%, Hongcheng Water Industry 61.68%, Chongqing Water Affairs 24.03%). The net cash flow of operating activities is 236 million yuan, the financial position is good, and the company has long-term investment value.
Profit forecast and investment rating: maintain the company's "overweight" rating. Regardless of the confirmed performance and asset injection during the construction period of the company's PPP project, and considering the repurchase compensation, we raise the company's profit forecast. It is estimated that the company's 2018-2020 EPS will be 1.26,0.40,0.43 yuan respectively, and the corresponding share price PE will be 4,13,11 times, maintaining the company's "overweight" rating.
Risk hints: the risk of the decline of sewage treatment charges, the risk that the expansion of the PPP project is not as expected, the risk of a substantial increase in accounts receivable, the risk of unrecognized income and profits during the construction of the PPP project, the risk of future acquisition and asset injection of the company, the risk that the project is not advanced as expected, and macroeconomic downside risks.
