Important events: Zhonghe Science and Technology released its performance forecast for 2019 and the first quarter of 2020. In 2019, the company achieved operating income of 2.791 billion yuan, an increase of 33.59% over the same period last year. The net profit attributed to shareholders of listed companies was 141 million yuan, an increase of 423.38% over the same period last year. The performance growth rate remained high, and revenue and profit slightly exceeded expectations. At the same time, the company issued a performance forecast for the first quarter of 2020, saying that the net profit attributable to shareholders of listed companies in the first quarter of 2020 was 126 million yuan to 160 million yuan, while the net profit attributed to shareholders of listed companies in the same period last year was 10.2419 million yuan. Compared with the profit level in the same period last year, there was a large loss in the first quarter of 2020. Combined with the impact of the current epidemic, the seasonal characteristics of the rail transportation industry and the fluctuation of the exchange rate of the country where the company does overseas business, the loss in the first quarter of 2020 is in line with expectations.

The rail transit plate and the water treatment business are working together, and the performance in 2019 is slightly higher than expected. In 2019, the company benefited from the increase in on-hand orders for urban rail signaling systems, resulting in a significant increase in revenue and gross profit in the intelligent transportation business sector. At the same time, with the national policy support for the environmental protection industry and the further improvement of environmental protection requirements, the operating capacity of the water treatment business sector has been improved, and the business income and profits of the water treatment plate increased to a certain extent in 2019, compared with 2018, the impact of goodwill impairment of the relevant subsidiaries of the environmental protection sector on the company's performance in 2019 has weakened. At the same time, as Suzhou Kehuan, the underlying asset of the company's major asset restructuring, failed to fulfill its 2018 performance commitment, the company completed the performance commitment to compensate the shares in 2019 and recognized the investment income accordingly.

The first quarter of 2020 results are under short-term pressure, and later results may be compensatory. The performance loss in the first quarter was affected by the domestic novel coronavirus epidemic and exchange rate fluctuations. For the rail transportation industry, the first quarter is the off-season of the industry, coupled with the impact of the epidemic, the delivery of contract projects in the first quarter is generally delayed in the short term, and operating income and profits are reduced. With the effective control of the domestic epidemic, project delivery gradually returned to normal, and the profitability is expected to recover compensatory in the future. Under the influence of the overseas epidemic outbreak in the first quarter, the exchange rate of the Mexican peso fluctuated suddenly and greatly, and the financial expenses of overseas subsidiaries increased significantly due to exchange rate fluctuations.

Profit forecast and investment rating: with the resumption of work, the company's 2020 order may have a limited impact. The urban rail industry is booming, the urban rail investment represented by the subway remains high, and the certainty of each link of the industrial chain benefits. It is estimated that the company's net profit from 2019 to 2021 will be 1.41 billion yuan, and it will maintain its "overweight" rating.

Risk hints: the impact of the epidemic exceeds expectations; the competition pattern worsens; other systemic risks.