Events:

The company released its semi-annual report 2020 on the evening of August 23: during the reporting period, the company achieved revenue of 784 million yuan, an increase of 16.10% over the same period last year, and a net profit of 153 million yuan belonging to shareholders of listed companies, an increase of 26.72% over the same period last year. The net profit after deduction was 152 million yuan, an increase of 38.79%. In this regard, our comments are as follows:

Main points of investment:

The steady growth in performance is mainly due to the simultaneous increase in the volume and price of sewage and the increase in sludge treatment capacity. The company's half-yearly report net profit for 2020 increased by 26.72% compared with the same period last year, which is in the upper limit of the previous performance forecast range, which is 25.19% higher than that of 2020Q1. With the impact of the epidemic gradually weakening, the company's performance growth rate is expected to continue to improve in the second half of the year. The increase in performance is mainly due to the operation of new sewage treatment projects, the adjustment of water prices for existing sewage treatment projects, the increase in the disposal of sludge treatment projects and the recovery of some accounts receivable. From the perspective of sub-business: 1) the revenue of investment and operation business was 292 million yuan, an increase of 17.46% over the same period last year, of which the revenue of sewage operation was 112 million yuan, an increase of 7.36% over the same period last year, and that of sludge business was 56.7617 million yuan, an increase of 35.71% over the same period last year. Changchun and Xinjiang projects respectively treat 1917,700 tons of sludge, a total daily treatment capacity of about 1150 tons, sludge business gross profit margin of 48.82%. Year-on-year increase in 16.89pct, with the gradual release of economies of scale and the sale of resource products, it is expected that there is still room for improvement in sludge business gross profit margin. 2) the revenue of the engineering business reached 325 million yuan, down 6.03% from the same period last year. Affected by the epidemic, some projects failed to start as scheduled, but six projects such as Wangcheng Phase III, Phase IV and Danyang were still completed in the first half of the year, and the project business is expected to accelerate in the second half of the year. The gross profit margin of the engineering business was 22.10%, which was 4.62% higher than the same period last year.) the equipment business realized revenue of 76.7801 million yuan, an increase of 12.59% over the same period last year. The company's comprehensive gross profit margin was 40.43%, an increase of 3.77pct compared with the same period last year. In terms of period expenses: the sales / management / finance / R & D expense rates are 1.25%, 6.09%, 5.74%, 1.35%, respectively, reducing 0.53/2.43/0.92/-0.47pct respectively compared with the same period last year. The company's comprehensive expense rate is 14.43%, which is reduced by 3.41pct, and the expenses during the period are well controlled. Accounts receivable totaled 809 million yuan, accounting for 12.96% of total assets, a decrease of 1.50pct compared with 14.46% in the same period last year. The net cash flow of operating activities (excluding cash paid by BOT and BT projects) was 100 million yuan, which was significantly higher than that of-112 million yuan in the same period last year.

Sufficient water orders, organic solid waste ready to start, performance growth guaranteed as an established water treatment enterprise, the company has a sound management style, did not participate in the vicious competition of PPP projects a few years ago, so the financial situation is good, in recent years began to develop projects, affected by the epidemic in the first half of 2020, bidding projects have decreased The company still won the bid for the project of black and smelly water treatment (pipe network improvement and upgrading) in the central city of Zhoukou City (185 million yuan), the third phase of Nantong project (design scale 200,000 tons per day, with a total investment of 432.7 million yuan), Jinchang Hexibao Chemical Circular economy Industrial Park sewage treatment Project Design, Purchasing and Construction General contract (EPC) Project (35 million yuan), etc., up to the half-yearly report. The order of the company's engineering category is 239 million yuan, the uncompleted investment of the franchise class is 771 million yuan, and the order is sufficient. At the same time, the company's monetary capital is 508 million yuan, and the asset-liability ratio is only 43.80%. There is still a lot of room for financing, and the landing of water projects is guaranteed.

At the same time, the company's organic solid waste project is ready to start. After the new plant of Changchun sludge project is put into operation, the operating efficiency has been improved, and it is expected to usher in the situation of rising sludge disposal volume and net interest rate.

Xinjiang and other seven sludge, kitchen, livestock and poultry manure projects are under construction, in addition, sludge integrated fermentation equipment is being tested and debugged, and it is expected to promote replication throughout the country in the future to create a leader in the field of sludge disposal. The company's water business is steadily rising, the organic solid waste business is ready to start, and the steady growth of annual performance is guaranteed.

Additional investment in Aidi Weixin to support the research and development of novel coronavirus vaccine to demonstrate social responsibility. On March 9, 2020, the company invested 18 million yuan to increase Beijing Aidi Weixin's equity of 4.7368%. Recently, Aidi Weixin (Suzhou), a wholly owned subsidiary of Aidi Weixin, successfully obtained the approval of novel coronavirus Phase I and II clinical trials approved by the State Drug Administration, with an additional investment of 12 million yuan. This vaccine, jointly developed by Aidi Weixin and Inovio Pharmaceutical of the United States, is the first COVID-19 DNA vaccine approved to carry out clinical trials in China, and it is also the first COVID-19 vaccine in the world to carry out clinical trials in China and the United States at the same time. It is one of the five emergency vaccine technical routes in China. It was approved by the Ministry of Science and Technology and was selected by the State Council to tackle the key task of COVID-19 joint defense vaccine. At present, the phase I clinical research program of the vaccine in China will be carried out in Huashan Hospital affiliated to Fudan University and is expected to be on the market soon.

Jiangsu Peng Harrier Pharmaceutical Co., Ltd., which is owned by the company's major shareholders, has a history of more than 50 years and has rich experience in the pharmaceutical field. The company invested in Aidi Weixin this time. On the one hand, based on the past experience of the pharmaceutical industry, it supports novel coronavirus's vaccine drug R & D and production enterprises related to epidemic prevention and anti-epidemic, and expands investments outside its main business. On the other hand, it is also aimed at the current severe epidemic situation of novel coronavirus, which can improve the level of domestic vaccine research and development, enhance the message of people protesting the epidemic, and show that the company has a high sense of social responsibility.

Profit forecast and investment rating: maintain the company's "buy" rating. The company's water business is growing steadily, and the organic solid waste business is ready to start. We are optimistic about the company's development prospects. It is estimated that the company's 2020-2022 EPS will be 0.69,0.89,1.06 yuan respectively, and the corresponding share price PE will be 13,10,9 times, maintaining the company's "buy" rating.

Risk hint: Aidi Weixin vaccine research and development is not as expected risk, project acquisition and promotion is not expected risk, accounts receivable risk of substantial increase, organic solid waste recycling project slow risk, macroeconomic downside risk.