Company News The company published its 2019 annual report and 2020 quarterly report. In 2019, the company achieved revenue of 4.170 billion yuan, an increase of 4.08% over the previous year, and net profit of 326 million yuan, an increase of 16.25% over the previous year. The performance was in line with expectations. The company released its 2020 quarterly report, achieving operating income of 651 million yuan, a year-on-year decrease of -5.54%, and net profit of 48 million yuan, a year-on-year decrease of -19.80%. The decline in performance in the first quarter was mainly due to the impact of the epidemic. The company and upstream and downstream enterprises were generally delayed in resuming work and production, the company's ongoing projects could not proceed normally as planned, and the progress of engineering projects was affected to a certain extent. As the domestic epidemic prevention and control situation stabilizes and improves, the company's performance is expected to recover. The steady growth of the event review operation business led to a steady increase in overall gross margin. The company achieved operating income of 4.170 billion yuan in 2019, of which the water operation business contributed 1,375 billion yuan in sales revenue, an increase of 16.23% over the previous year; the environmental engineering EPC business contributed 2,597 billion yuan in sales revenue, a year-on-year decrease of 1.93%; and the sewage treatment equipment sales business contributed 184 million yuan in sales revenue, in line with expectations. The company's operating revenue accounted for 32.97%, a continued increase of 0.03 pct over the same period last year. Currently, the treatment scale of the sewage treatment plants owned by the company (including under construction) reached 5.61 million tons/day, an increase of 500,000 tons/day over the end of 2018. The steady growth of operating business has also led to an increase in the company's overall gross margin. The company's overall gross margin in 2019 was 24.89%, up 2.86pct from the same period last year, increasing profitability. The company has sufficient orders in hand, and performance growth is guaranteed. The company added 7 new investment projects throughout 2019, all of which are upgrades to the company's existing projects. The amount of new operating orders for the whole year was 622 million yuan, and the uncompleted investment amount for orders during the construction period was 2,761 million yuan. 107 new projects such as EP and EPC were added, with a total contract value of 3,036 billion yuan, and unconfirmed revenue from ongoing orders of 3,927 billion yuan. The company has sufficient orders in hand, and there is strong certainty about performance growth. China Energy's investment is expected to have a synergistic effect. Continuing to be optimistic about the development of the company's asset-light operations, the company plans to transfer 15% of Guozhen Environmental's shares to China Energy. After completing the transaction, China Energy will own 23.69% of the company's shares and become the company's controlling shareholder. The transfer price is 14.6636 yuan/share. The premium transfer also shows shareholders' confidence in the company's development. The equity transfer company is accompanied by a “Performance Commitment Compensation Agreement”, and the company promises that the net profit for 2020 will not be less than 350 million yuan. After being optimistic about China Energy Saving Holdings, it formed a joint effort with the company's business to further strengthen the company's competitiveness in the Yangtze River protection market and further promote the development of the company's asset-light operation business. Investment recommendations The company's business covers the three major water treatment fields of urban water environment, small towns, and industry. It is predicted that in 2020-2021, the company will achieve net profit attributable to the parent company of 397 million yuan, 439 million yuan and 494 million yuan respectively, with year-on-year increases of 21.56%, 10.52% and 12.62% respectively; EPS is 0.58 yuan, 0.65 yuan and 0.73 yuan respectively, and the corresponding dynamic price-earnings ratios are 17.86 times, 16.16 times, and 14.35 times, respectively. The company's operating performance continues to grow steadily, and China Energy has invested at a premium, demonstrating confidence in the company's development. We are optimistic that China Energy will help the company compete for the Yangtze River protection market. The company's overall gross margin increased and profitability increased in 2019. We continue to be optimistic about the development of the company's asset-light operations. For the next six months, maintain the “increase in holdings” rating. Risks indicate the risk that gross margin will decline due to increased competition in the market; the risk that financing improvements will not meet expectations; and the risk that project progress will not meet expectations.