Events:

The company released its 2019 annual report on March 28: during the reporting period, the company realized revenue of 1.74 billion yuan, an increase of 69.40% over the same period last year, realized a net profit of 464.5763 million yuan belonging to shareholders of listed companies, an increase of 12.13% over the same period last year, and realized a net profit of 472.7744 million yuan after deduction, an increase of 50.90% over the same period last year. At the same time, it is proposed to distribute 2.5 yuan (including tax) to all shareholders for every 10 shares. In this regard, our comments are as follows:

Main points of investment:

Revenue increased by 69.40%, sewage operation and engineering business both increased by 1.74 billion yuan in 2019, an increase of 69.40% over the same period last year, and the attributable net profit after deduction was 472.7744 million yuan, an increase of 50.90% over the same period last year, which was within the range of performance forecast and in line with expectations. The main reasons for the great increase in revenue and non-deduction vested net profit are as follows: 1) the new engineering business income is 461 million yuan, and the gross profit margin is 19.36%. 2) the sewage operation business achieved revenue of 1.032 billion yuan, an increase of 18.41% over the same period last year, with a gross profit margin of 54.65%, and an increase in 7.52pct compared with the same period last year. Due to the sewage price adjustment of the company's four waterworks in Malongkou, Matougang, South Sanhuan and Mazhai, the company received sewage treatment fees for a total of 3.5 years from July 1, 2016 to the end of 2019, resulting in a substantial increase in sewage operation revenue and gross profit. In terms of period expenses: the sales expense rate is 0.2%, the year-on-year increase of 0.07pct, the management / R & D / financial expense rate of 5.75%, 2.52% and 4.12%, respectively, and the reduction of 2.47/1.05/0.77pct, respectively, compared with the same period last year. The company's comprehensive period expense rate is 12.60%, which is reduced by 4.23pct over the same period. The net cash flow generated by operating activities was 771 million yuan, an increase of 174.17% over the same period last year, mainly due to the receipt of sewage treatment fees and the increase in project income.

With the continuous improvement of the industrial chain, sufficient orders and abundant funds, the company will continue to expand the industrial chain on the basis of urban sewage treatment and central heating. At present, it has been extended to reclaimed water reuse, biogas utilization, construction waste, village sewage, watershed treatment, sludge treatment, environmental protection equipment manufacturing, new energy manufacturing, landscaping and other fields. The scope of business covers "big public, big environmental protection, big ecology" and other plates, the company continues to improve the industrial chain to build a comprehensive environmental service provider, and show a first-class ability to take orders. As of March 2020, the company currently has a total investment of 17.471 billion yuan in PPP and solid waste projects, with full orders. At the same time, with a monetary capital of 1.607 billion yuan and an asset-liability ratio of 40.87%, there is still a lot of room for financing, full orders + abundant funds, and the company has sufficient stamina for future development.

Selected state-owned enterprise reform two hundred enterprises, join hands with Henan assets, asset injection is expected to speed up August 2018, the company was included by the State-owned assets Supervision and Administration Commission of the State Council into the state-owned enterprise reform two hundred enterprises, in October 2018, the company and controlling shareholder Public Utilities Group signed a strategic cooperation framework agreement with Henan assets The three parties plan to cooperate in supporting the implementation of the "two hundred enterprises" reform, promoting the solution of inter-industry competition, the integration of business resources, and comprehensive financial services. Henan assets is a local asset management company controlled by Henan Investment Group, shouldering three major missions: resolving regional financial risks, serving the reform of state-owned enterprises, and supporting industrial transformation and upgrading. at the same time, Henan assets has bought shares of the company from the secondary market. with 4.95% equity ratio to become the company's second largest shareholder, the company joined hands with Henan assets, it is expected that the reform process and transformation and upgrading of state-owned enterprises will be accelerated. It was announced in April 2019 that the Public Utilities Group, a major shareholder, paid 100% of its equity in the purification company into the listed company, and promised to thoroughly solve the problem of inter-industry competition by July 31, 2020. The purification company has Zhengzhou New District sewage treatment Plant (1 million tons / day) and Shuangqiao sewage treatment Plant (600,000 tons / day) as well as sludge business. If assets are injected, it will bring greater performance flexibility to the company. 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 reform of state-owned enterprises is worth looking forward to.

Earnings forecast and investment rating: upgrade the company to "buy" rating. The company's engineering business began to contribute to the performance, we raised the company's profit forecast, not considering the impact of asset injection on the company's performance, it is expected that the company's 2020-2022EPS is 0.51,0.55,0.63 yuan respectively, the corresponding share price PE is 12,11,10 times, while the PB is only 1.03, the company is upgraded to the "buy" 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 that the construction of the PPP project is lower than expected, the risk of future acquisition and asset injection of the company, the risk that the project is not as expected, and the risk of macroeconomic downside.