1H19's performance was slightly lower than expected, maintaining an “increase in holdings” rating. According to the company's announcement, 1H19 achieved operating income/net profit attributable to mother/net profit of 4.4/0.5/0.5 billion yuan, -18%/-22%/-19% year-on-year, and the performance was slightly lower than expected. On a quarterly basis, 2Q revenue was -35% year-on-year, the first decline since listing; expenses were +65% year over year, gross margin was +17pct year over year, and operating cash flow was +669% year over year. The main reason is that the company's concept of “steady growth, careful investment, healthy management, and innovative development” is gradually being implemented, actively abandoning high-risk and low-return projects. We lowered our previous profit forecast. We expect net profit to be 1.01/1.20/140 billion yuan (previous value 1.38/1.70/2.02) for 2019-21, respectively, and the corresponding EPS of 0.70/0.83/0.96 yuan. The company will be given a target P/E of 19.5-20.5x in 2019, corresponding to a target price of 13.68-14.38 yuan, maintaining the “increase” rating. Abandoning high-risk and low-return projects, the regional layout accelerated, and the 2Q19 performance fell short of expectations. 2Q19 achieved operating income/net profit attributable to mother/net profit of 2.9/0.4/0.4 billion yuan, or -35.4%/-23.7% year-on-year, the first decline in revenue since listing. At the same time, the cost growth rate during the period increased by 6.0 pct to 65.2% month-on-month, causing performance to fall short of expectations. The main reasons are: 1) The company's revenue from the environmental infrastructure construction service business declined year on year; 2 ) Expenses increased significantly during the period: 2Q19 sales expenses/financial expenses/management expenses (including R&D expenses) were +38.3%/+72.0%/+68.5% year-on-year. The main reason was that the company expanded its business scale, increased loans, and increased investment in R&D. The newly established Anhui and Shaanxi branches brought about an increase in management expenses. 2Q19 gross margin increased sharply by 17pct, and cash flow from operating activities/investment activities improved significantly. 2Q19's gross margin was 36.6%, +17.1pct. The company selectively abandoned some high-risk projects, leading to a significant increase in gross margin while sacrificing revenue, laying a good foundation for the company's long-term development. At the same time, the company's net cash flow from operating activities in the second quarter was 100 million yuan (+669.4% YoY), and the net cash flow outflow from investment activities was 130 million yuan (-34.0% YoY). Thanks to the company's strict control of the quality of newly acquired projects, prudent investment, cash flow from operating activities and investment activities improved significantly. Nanzi Environmental Protection has performed well. Future development potential is expected. The company acquired Nanzi Environmental Protection (60% shareholding ratio) in April '18 and successfully entered the highly profitable field of toxic and difficult to degrade industrial wastewater treatment. 1H19 Nanzi Environmental Protection added a contract amount of more than 80 million yuan, achieving net profit of 28.597 million yuan, accounting for 37.8% of the net profit attributable to the mother according to the amount of shares held. We are optimistic about its technical advantages and high-quality channels in the field of sewage disposal, and future development potential can be expected. The profit forecast was lowered to maintain the “increase in holdings” rating. Considering that the company is in the early stages of the “steady operation and healthy development” strategy transformation, and the combined 1H19 performance was slightly lower than expected, we lowered the previous profit forecast. The net profit to the mother for the year 2019-21 is 1.01/1.20/140 million yuan (previous value 1.38/1.70/2.02), corresponding to EPS of 0.70/0.83/0.96 yuan. Referring to the median P/E of comparable companies in 2019, we are optimistic about the long-term operating benefits brought to the company by the strategic transformation, give an appropriate premium, give the company a target P/E of 19.5-20.5x in 2019, corresponding to a target price of 13.68-14.38 yuan, and maintain the “gain” rating. Risk warning: New orders fall short of expectations, water environment treatment falls short of expectations, etc.