1~3Q20 performance is in line with our expectations

The company announced 1~3Q20 results: revenue of 4.434 billion yuan, an increase of 8.3% over the same period last year; net profit of 1.506 billion yuan, an increase of 4.4% over the same period last year, corresponding to 0.31 yuan per share; if you look at 3Q20 alone, the company's revenue was 1.839 billion yuan, an increase of 19.8% over the same period last year; and net profit of 714 million yuan, an increase of 19.2% over the same period last year, in line with our expectations.

The operating data increased steadily: 1) the water supply sector sold + 5.4% to 410 million cubic meters compared with the same period last year; 2) the sewage treatment plate handled + 8.6% to 902 million cubic meters compared with the same period last year.

Company profitability repair. 1C3Q's gross profit margin increased to 47.0% from the same period last year, the company recovered from the impact of the epidemic, capacity utilization increased to improve the company's profitability, 3Q20 gross profit margin of 55% was significantly higher than 1Q20 (35%). Good cost control led to a decrease of 1.1ppt to 13.9% during the 1Q period compared with the same period last year.

The cash flow is stable, and the net operating cash flow of the company increased 3.7% to 1.755 billion yuan compared with the same period last year. The abundant cash flow ensures the steady expansion of the company's production capacity.

Trend of development

The price of sewage disposal has increased, supporting performance growth. According to the notice of the Chongqing Municipal Finance Bureau, the settlement price of the company's fifth phase of sewage treatment services (2020-2022) increased by 0.21 yuan per cubic meter to 2.98 yuan per cubic meter, with an increase of 8%. At the same time, the price of the Qingbaijiang project in Chengdu increased by 51% to 2.326 yuan per cubic meter in June, which led to an increase of 150 million yuan (7.7%) in sewage treatment service income from January to August, with a steady increase in profitability.

The production capacity has increased steadily and the new market for sludge disposal has been added. In the third quarter, the company's Hubei ANLU sewage treatment project (15,000 tons / day) was put into operation. We estimate that the company's current reserve of 90,000 tons / day for sewage disposal and 700,000 tons / day of water supply capacity is expected to be put into production in the next two years. At the same time, the company's layout of sludge disposal in emerging markets, we think it is expected to further thicken the performance.

Profit forecast and valuation

We maintain net profit of 1.725 billion yuan in 2021 for 2020max, and the current share price corresponds to 14.3 times 2021 P / E for 2020. Maintain the "outperform industry" rating and keep the company's target price unchanged at 6.5 yuan, which has 25% upward space compared to the current stock price, corresponding to 18.1 times 2020max 2021 price-to-earnings ratio.

Risk.

The downside risk of sewage disposal fee; the project is not as expected; the risk of interest rate fluctuation.