Zhongshan Gonggong is the only state-owned listed company in Zhongshan, and Fosun Group was introduced as a strategic investor in 2014, with high-quality local resources and location advantages. At present, the direction of Zhongshan's main environmental protection business is becoming more and more clear. It will be transformed from a utility platform to an environmental protection platform, and will support the expansion of the main environmental protection business with sufficient funds in the future.

At present, the company's overall market value has been broken, and the current valuation has a margin of safety. In the future, new business development such as the commissioning of the Tianyi Energy Project, the increase in water prices, sanitation, and village sewage treatment will bring flexibility to environmental protection business growth, giving it a “Cautious Recommendation - A” rating.

1. Zhongshan Public Corporation is the only local state-owned listed company in Zhongshan. It successfully introduced Shanghai Fosun Group as a strategic investor in 2014, taking a major step in deepening the mixed reform of state-owned enterprises in Zhongshan.

Zhongshan is one of the five prefecture-level cities without municipal districts in China. It covers an area of about 1,800 square kilometers and has a resident population of about 3.2 million people. The GDP reached 350 billion yuan in 2017, the per capita GDP exceeded 100,000 yuan, and the fiscal revenue in 2017 was 31.2 billion yuan. At the same time, Zhongshan is also of great strategic importance in terms of location. Zhongshan is a support point for the integrated development of the east and west sides of the Pearl River, a hub city in the coastal economic belt, and an important pole in the Guangdong-Hong Kong-Macao Greater Bay Area.

Zhongshan Public Utilities is the only state-owned listed company in Zhongshan. Its business covers environmental water, solid waste treatment, sanitation services, engineering construction, market operation, port passenger transportation, financial services and equity investment, and has many subsidiary companies and more than 3,700 employees.

In 2014, Zhongshan Public Corporation promoted mixed ownership reform and successfully introduced Fosun Group as a strategic investor

II. Overview of Zhongshan Public Corporation's subsidiaries and subsidiaries

Zhongshan Public Corporation has a large number of businesses and subsidiaries. Among them, the businesses and subsidiaries that contribute more to performance are:

1. Zhongshan Public Water Co., Ltd. and Zhongshan Sewage Treatment Co., Ltd. (100% equity): It is responsible for various water supply and sewage treatment projects of the company.

2. Zhongshan Tianyi Energy Co., Ltd. (100% equity): Mainly engaged in waste incineration business. In 2015, the company entered the waste incineration treatment business through acquisition. Currently, the Tianyi Energy Phase III waste incineration project is under construction.

3. Zhongshan Public Environmental Protection Industry Investment Co., Ltd. (100% equity): It is mainly engaged in industrial investment and is responsible for a number of industrial investment or M&A funds. The most prominent of these is the Zhuhai Guangfa Xinde Environmental Protection Industry Investment Fund Partnership (Limited Partnership) (Zhongshan Public owns 10.39% of the shares), which has successfully invested in various projects such as Ningde Times, Shanghai Plastic Rice Information, Overseas Chinese Bank Environmental Protection, and Puppy Electric.

4. Zhongshan Public Market Management Co., Ltd. (100% equity):

The market operation business segment has 33 agricultural trade (wholesale) markets and commercial entities (including the Zhongshan Agricultural Products Trading Center and Guangming Market, the two largest fruit, vegetable, and seafood wholesale markets in Zhongshan), covering a total area of about 450,000 square meters. The business scope covers the urban area of Zhongshan City and 18 towns, with more than 6,000 merchants. It is the largest farmers' market cluster in Zhongshan.

5. Mingcheng Technology (95.5% controlling interest, some shares not transferred): a platform for the company's sanitation business development.

6. China-Hong Kong Passenger Transport Joint Venture Co., Ltd. (60% controlling interest):

7. The passenger port of Zhongshan Port is located in the Huoju High-tech Industrial Development Zone in Zhongshan City, Guangdong Province. It is located on the south bank of the Hengmen Waterway. The waterway journey with Hong Kong is only 49 nautical miles. Currently, China-Hong Kong Passenger Transport has its own four luxury high-speed catamarans with modern equipment, including “Zhongshan”, “Yixian”, “Jinzhu Lake”, and “Xingzhong”, and leases the “Taishan” and “Pengxing” ships. It makes 24 single voyages between Zhongshan and Hong Kong every day. It can run 32 voyages per day during peak periods, with a voyage time of 1 hour 30 minutes. From 1985 to 2017, 29.72 million passengers were transported safely and with high quality, including 1,2994 million passengers carried in 2017, setting a new record for annual traffic. In December 2004, the company opened the Zhongshan-Hong Kong International Airport route; on August 18, 2017, the Zhongshan to Shenzhen Fuyong Airport Terminal route was opened. There are 8 single flights a day, with a voyage time of 45 minutes, making due contributions to the accelerated integration of Zhongshan into the Guangdong-Hong Kong-Macao Greater Bay Area.

8. GF Securities Co., Ltd. (10.33% participation): GF Securities contributes greatly to the company's annual performance, and its investment income company provides sufficient cash flow support.

III. Analysis of the current status and future growth points of the main business of Zhongshan Public Utilities

According to the second part of the subsidiary sorting, the company's current main business mainly includes water (water supply+sewage), solid waste (waste incineration+sanitation), passenger transportation, market leasing, and brokerage.

1. Water services: Water supply is expected to rise in water prices, and sewage treatment is entering the village and town sector

Currently, the company has a water supply scale of about 2.38 million tons, accounting for 80% of the total water supply in Zhongshan City. The company's production and sales margin control has been excellent over the years, and it is at a very low level, which shows good management ability. In the future, in terms of water supply business volume, since the share of the city in Zhongshan is already high, the increase is mainly due to natural population growth, which is expected to increase by about 3%-5% per year.

However, water prices in Zhongshan are currently at the lowest level compared to surrounding cities, so there is a possibility that prices will rise in the future. If water prices are raised, the company's water supply profit will increase significantly.

In terms of sewage treatment, the company currently has a scale of about 580,000 tons, accounting for about 35% of Zhongshan's share. There is still room for growth in the future, and the sewage business is expected to grow by about 10% per year.

In addition, recently, the company has issued a number of announcements. The company's water sector is expanding towards water environment treatment and village sewage treatment, and there will be new business growth in the future.

(1) The company and its wholly-owned subsidiary Zhongshan Public Works Co., Ltd. jointly invested 20 million yuan to establish Zhongshan Public Water Environmental Treatment Co., Ltd. to carry out sewage network and pumping station operation service business. On September 10, 2018, Zhongshan Public Corporation disclosed the “Notice Concerning the Company and Subsidiaries Receiving the Notice of Winning the Tender”, which won the bid for sewage network and pumping station operation services in the central urban area of Zhongshan. The winning bid amount was 24,561,551.52 yuan/year, for a three-year term. In the future, Zhongshan Public Utilities will use Zhongshan Public Water and Environmental Treatment Co., Ltd. as a platform to expand the commissioned operation of the sewage network.

(2) A consortium formed by the company and China Airlines Environment won the bid for the “PPP Project for Rural Domestic Sewage Treatment Facilities in Four Towns Including Huicheng Street in Xinhui District”, with a total investment of 29,036 million yuan. The project period was 30 years, including the design, construction, operation and maintenance of 94 new rural sewage treatment facilities and supporting sewage collection pipelines; operation and maintenance of rural sewage treatment facilities and supporting sewage collection pipelines invested and operated by the government in the four towns

2. Waste incineration: The Tianyi Energy Phase III project is expected to be put into use in 2019, which will gradually increase the profit of the solid waste business

In 2015, the company entered the garbage disposal business through an acquisition, mainly serving 8 towns in northern Zhongshan. Tianyi Energy's first and second phase projects have a total investment of 500 million yuan, a processing capacity of 360,000 tons/year, and a power generation capacity of about 100 million kilowatts per year. In 2016, the company started Tianyi Phase III expansion (daily processing capacity 1,200 tons/day). Currently, Phase III of Tianyi is under construction, with a total investment of 670 million yuan. It is estimated that 438,000 tons of garbage will be treated annually, with an annual power generation capacity of about 200 million kilowatts/year, double the power generation capacity of the first and second phase projects. The third phase is expected to be put into use in 2019, which will gradually increase the profits of the company's waste incineration business.

3. Sanitation: Mingcheng Technology is delisted from the New Third Board, competition issues in the industry are resolved, and the expansion of sanitation projects will accelerate

In July 2018, the company acquired 95.5% of Mingcheng Technology's controlling interest in 236 million dollars. It plans to develop the sanitation business and form a business collaboration with the company's Tianyi Energy waste incineration business in the solid waste field. Mingcheng Technology is mainly engaged in urban cleaning and garbage collection and transportation business, accounting for more than 20% of the market share of Zhongshan City and about 90% of the urban area of Zhongshan City. In 2017, Mingcheng Technology achieved operating income of 147 million yuan and net profit of 16.22 million yuan; in the first half of 2018, Mingcheng Technology achieved a 25% increase in revenue and a 22% increase in net profit.

However, as a third-board enterprise, Mingcheng Technology still has competition issues with listed companies in the same industry, affecting the vigorous expansion of the company's sanitation projects in other regions. In December 2018, Mingcheng Technology, a holding subsidiary of the company, held a board meeting to deliberate and pass the “Proposal on Applying for the Termination of Listing of Company Shares in the National SME Share Transfer System”. After Mingcheng Technology is delisted this time, competition issues in the sanitation business will be resolved, and the company will also quickly integrate its own resources to speed up the expansion of sanitation projects abroad.

4. Other businesses such as passenger transportation and market leasing

The passenger traffic volume of China-Hong Kong Passenger Transport, which is controlled by the company, will also increase in recent years. With the opening of new routes in August 2017 and the continuous increase in future routes, there will be a significant increase in future passenger traffic.

In terms of the leasing business in the market, rents are expected to rise, and the business model is also likely to be adjusted. There will still be increased certainty in the future

IV. The future development strategy and core advantages of Zhongshan Public Utilities

In the future, the development focus of public utilities in Zhongshan will change from traditional public utilities to “big environmental protection” comprehensive environmental protection services, while the new focus of development will be in the three directions of village sewage treatment, sanitation, and solid waste treatment. The advantages of its development lie in local government resources, location advantages in the Guangdong-Hong Kong-Macao Greater Bay Area, adequate and low-cost financial support, and strategic support provided by other relevant companies such as Fosun Group.

Local government resources: The company is the only state-owned listed enterprise in Zhongshan. It has the highest quality local projects, and local resources are also skewed towards the company. At the same time, the Zhongshan Municipal Government and the State Assets Administration Commission are also strongly supporting the company's going global, which will also help the company to implement offsite projects.

Zhongshan has the location advantage of the Guangdong-Hong Kong-Macao Greater Bay Area: Zhongshan is the support point for the integrated development of the east and west sides of the Pearl River, a hub city in the coastal economic belt, and an important pole in the Guangdong-Hong Kong-Macao Greater Bay Area. The future has great potential for both population growth and industrial development.

Adequate and low-cost financial support: Zhongshan Public Utility's proprietary business has stable income, abundant cash flow, and continues to have a strong return on investment as the third largest shareholder of GF Securities. Currently, the company's balance ratio is only 26.3%, and there are plenty of financing channels, large financing amounts, and low capital costs. In 2018, the company issued 1 billion corporate bonds with an interest rate of 5.3%.

Strategic support from Fosun Group and other related companies: In 2014, after Fosun Group's participation in Zhongshan Gonggong completed mixed reform, the overall market felt that the new business was progressing slowly and that the changes were not obvious. Actually, it was related to the business development ideas of the former management of Zhongshan Gonggong. In March 2017, the former chairman of Zhongshan Gonggong resigned; in April 2017, a new chairman took office, and in March 2018, the company's executives changed many new forces. The company's overall development will be more active, and cooperation with other relevant companies such as Fosun Group to promote new business is also expected to accelerate. We can continue to pay attention to related changes in the future.

5. Investment value summary: Market capitalization has broken through, stock prices have a safe margin, and the direction of the main environmental protection business is becoming more and more detailed. The future growth rate of the environmental protection business will accelerate to a certain amount of business growth and maintain the “Cautious Recommendation - A” rating.

At present, the direction of Zhongshan's main environmental protection business is becoming more and more clear. It will be transformed from a utility platform to an environmental protection platform, and will support the expansion of the main environmental protection business with sufficient funds in the future. Currently, the total market value of the company is 10.32 billion yuan. After deducting that the A-shares of GF Securities account for 9.01% of the total share capital, the equity value of GF Securities is about 8.5 billion yuan and H shares account for 1.32% of the total share capital, the corresponding market value of the remaining environmental utility business is only 920 million yuan, while its net assets for water projects are already 1.88 billion yuan. In addition, 60% of the shares of China-Hong Kong Passenger Transport correspond to net assets of 250 million yuan, land value of market leased land, Tianyi Energy and sanitation projects, etc. The company's overall market value has already been destroyed. If only the corresponding market value of the environmental utility business sector is taken into account, it is less than 40% of the net assets.

Excluding GF Securities's revenue, we expect that the company's other businesses will achieve net profit attributable to RMB 220 million and RMB 290 million respectively in 2018-2019. After adding GF Securities's revenue, the overall net profit attributable to it is about 760 million yuan, or 940 million yuan. The current valuation has a margin of safety. In the future, new business development such as the commissioning of Tianyi Energy projects, water price increases, sanitation and village sewage treatment will bring flexibility to environmental protection business growth, giving the “Prudential Recommendation - A” rating.

6. Risk warning: The impact of overall municipal fluctuations on the market value and business of GF Securities; new business expansion is slow.