The company reported that the income in the first half of the year was 338 million yuan, down 1.39% from the same period last year, and the net profit returned to the mother was 79.5 million yuan, an increase of 36.17% over the same period last year, deducting the non-return net profit of 66.64 million yuan, an increase of 22.80% over the same period last year. With the resumption of work and production after the epidemic, and the delivery of 19-year winning projects such as Tianjin in the second quarter, water meter orders and construction have returned to normal. The single-quarter income of Q1/Q2 is 96 million / 243 million respectively, a year-on-year growth rate of-34% and 23%. The full-year performance is expected to be 240 million, an increase of 25%, corresponding to 23 times the valuation of PE, with a "prudent recommendation-A" rating.

The increase in the proportion of smart meters led to an increase in the comprehensive gross profit margin (0.59pct) to 37.83%. In terms of products: 1) the revenue of smart meters in the first half of the year was 181 million, slightly increased by 2.46% compared with the same period last year, and the gross profit margin was 43.38%, down 2.03 pct%. 2) Mechanical watch income was 103 million, down 12.86% from the same period last year, and the gross profit margin was 25.22%, a slight increase in 0.15pct over the same period. Although there is a gap between the delivery of smart meters in the first half of the year and the target at the beginning of the year, there is still an increase compared with the same period last year. The third and fourth quarters are the peak season for the industry. The growth rate of smart meter revenue is expected to increase in the second half of the year, with a target of 3 million smart meters for the whole year, an increase of 25 per cent over 19 years.

During the period, the cost control was stable, with four fees accounting for 21.92% of the income, reducing 0.73pct. Sales expenses 35.41 million, expense rate 10.47% decreased 0.48pct compared with the same period last year; administrative expenses 19.1 million, expense rate 5.65% year-on-year increase of 0.24pct; research and development expenses 21.51 million, expense rate 6.36% year-on-year decrease of 1.01pct; financial expenses-1.91 million, an increase of-3.7 million over the same period last year, mainly due to the decrease in interest income.

The profit side increased significantly, mainly due to fair value change income, investment income and other income increased compared with the same period last year. Under the condition that the income end is basically flat, the net profit of homing in the first half is 79.5 million, an increase of 21.12 million over the same period. The main reasons include: 1) the fair value change income from the transfer of TECO environment and other transactional financial assets is 12.63 million; 2) the investment income increases by 3.38 million; and 3) the software VAT rebate including other income increases by 4.95 million.

The net operating cash outflow was 49.89 million, an increase of 25.40% over the 39.78 million outflow in the same period. Mainly due to the obvious periodicity of cash flow in the water meter industry, it is usually concentrated in the second half of the year, especially at the end of the year. From the perspective of projects that take up more cash flow, inventory 282 million increased by 42.53 million compared with the beginning of the period; accounts receivable 493 million decreased by 10 million compared with the beginning of the period, because the increase in receivables in 19 years was mainly due to the non-acceptance of the Tianjin project in the New year, and it is expected that the future receivables will be maintained at around 500 million; the number of items payable decreased by 68.04 million, mainly due to a reduction in taxes and fees payable.

Thanks to the demand for the transformation of the intelligent pipe network of the Water Department, as well as the decline in the technology / cost of smart meters, especially NB meters, the penetration rate of smart meters in the industry is in the stage of rapid improvement. As a domestic veteran water meter factory, the company went on the market relatively early. In the past two years, the customer strategy has changed from small and medium-sized cities to major cities, leading to a rapid increase in income. We estimate that the company's 20-year smart meters are expected to reach 3 million, including 2 million NB meters, with net profits of 240 million, 280 million and 340 million respectively in 2020-22, corresponding to PE valuations of 23, 20 and 16 times, with a "prudent recommendation-A" rating.

Risk tips: large fluctuations in upstream raw materials, resulting in cost pressure; smart water meter permeability increase is lower than expected; smart water meter industry attracts a large number of new entrants, competition worsens.