Incidents:

The company released its 2020 quarterly report on the evening of April 29: during the reporting period, the company achieved revenue of 415 million yuan, an increase of 32.80% over the previous year, and achieved net profit attributable to shareholders of listed companies of 123.3693 million yuan, an increase of 99.76% over the previous year, and achieved net profit attributable to shareholders of listed companies of 122.4674 million yuan after deduction, an increase of 101.45% over the previous year. Our comments on this are as follows:

Key points of investment:

Q1 Net profit doubled, exceeding market expectations, mainly due to price increases and an increase in engineering business. The company reported revenue of 415 million yuan in the first quarter of 2020, an increase of 32.80% over the previous year, and achieved net profit attributable to shareholders of listed companies of 123.3693 million yuan, an increase of 99.76% over the previous year, and achieved net profit attributable to 122.4674 million yuan after deduction, an increase of 101.45% over the previous year, exceeding market expectations. The reason for the sharp increase in performance was: 1) Zheng Dong Water's (100,000 tons/day) sewage treatment fee increased by 0.21 yuan/m3, which began on July 1, 2016. The sewage treatment fees that have risen over a total of 3 years and 9 months were confirmed in 2020/Q1; 2) the construction and management business continued to develop, and revenue increased year-on-year. In terms of period expenses: The sales/management/R&D/finance expenses ratio was 0.06%/4.64%/1.72%/4.98%, respectively, a decrease of 0.07/0.07/0.40/0.45pct compared to the same period last year. Expenses for the period were well controlled. Net cash flow from operating activities was -136 million yuan, a year-on-year decrease of 160.67% compared to 226 million yuan in the same period last year, mainly because sewage treatment fees for the previous year were received in the same period last year.

The industrial chain is continuously improved+sufficient orders+sufficient capital. After the company's future development, the company continues to expand the industrial chain based on urban sewage treatment and centralized heating. It has now 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 sectors. The company has continuously improved the industrial chain to build a comprehensive environmental service provider, showing first-class capabilities. As of January 2020, the company currently has invested a total of 17.471 billion yuan in PPP and solid waste projects, and the orders on hand are full. At the same time, the monetary capital in hand is 1,607 billion yuan, and the balance ratio is 49.39%. There is still plenty of room for financing. Orders are full and capital is plentiful, and the company is strong after future development.

It was selected as a state-owned enterprise to reform double hundred enterprises and joined forces with Henan assets. Asset injection is expected to accelerate. In August 2018, the company was included in the State-owned Assets Administration Commission of the State Council as a state-owned enterprise reform dual hundred enterprise. In October 2018, the company and the controlling shareholder Utility Group signed a strategic cooperation framework agreement with Henan Assets. The three parties plan to cooperate in supporting the implementation of “double hundred enterprises” reform and promoting solutions to competition in the industry, business resource integration, and comprehensive financial services. Henan Asset is a local asset management company controlled by Henan Investment Group. It is charged with the three major missions of mitigating regional financial risks, serving the reform of state-owned state-owned enterprises, and supporting industrial transformation and upgrading. At the same time, Henan Asset has already purchased company shares from the secondary market, becoming the company's second largest shareholder with a 4.95% equity ratio. The company teamed up with Henan Assets. It is expected that the reform process and transformation and upgrading of state-owned enterprises will accelerate. In April 2019, it was announced that the majority shareholder, Utility Group, would transfer 100% of its shares in the purification company to the listed company for a fee, and promised to completely resolve the issue of competition in the industry by July 31, 2020. The purification company has the Zhengzhou New Area Sewage Treatment Plant (1 million tons/day), the Shuangqiao Sewage Plant (600,000 tons/day), and the sludge business. If assets are injected, it will bring greater performance flexibility to the company. Furthermore, the majority shareholders have assets such as waste-to-energy and tap water businesses, and the possibility that they will be injected into listed companies in the future is not ruled out. As the only state-owned environmental protection platform in Henan Province, the reform of state-owned enterprises is worth looking forward to.

Profit forecasts and investment ratings: Maintain the company's “buy” rating. Due to rising water and sewage treatment fees for the company's sewage plant in Zhengdong, we slightly raised the company's profit forecast without considering the impact of asset injection on the company's performance. The company's 2020-2022 EPS is expected to be 0.52, 0.65, and 0.63 yuan respectively. Corresponding to the current stock price PE is 13, 12, and 11 times, maintaining the company's “buy” rating.

Risk warning: the risk of sewage treatment fees falling short of expectations, the risk of PPP project expansion falling short of expectations, the risk of a sharp increase in accounts receivable, the risk that PPP project construction falls short of expectations, the risk that the company's future acquisitions and asset injection are uncertain, the risk that the project will not advance as expected, and the risk of a macroeconomic downturn.