Summary of the report
Dianchi Lake Water is the leading enterprise of sewage treatment in Yunnan Province. Dianchi Water was established in 2010 and listed on the main board of the Hong Kong Stock Exchange in April 2017. Kunming Dianchi Investment, the controlling shareholder, is a state-owned enterprise under Kunming State-owned assets Supervision and Administration Commission.
The company is a leader in the service industry of municipal sewage treatment and reclaimed water supply in Yunnan Province, and its business extends to the field of tap water and water environment treatment. The company has rich experience in operating in the industry. its first waterworks was founded in 1989 and won the 30-year sewage treatment franchise in Kunming in 2011. up to June 30, the company has 48 water projects (including trusteeship) with a design capacity of 221.2 million tons per day, with a layout of many provinces and Laos in Southeast Asia. In terms of design capacity and actual treatment capacity, the company is the largest municipal sewage treatment enterprise in Yunnan Province.
Leading enterprise of water affairs in Yunnan province. By June 30, the company held 28 sewage treatment plants with a design capacity of 162.6 million tons per day, including 6 plants with reclaimed water supply capacity with a design capacity of 44,000 tons per day, and 6 waterworks with a design capacity of 86,000 tons per day. Trusteeship operates 11 sewage treatment plants with a design capacity of 500,000 tons per day. The company's sewage treatment business has a market share of 97.2% in the main urban area of Kunming, while Yunnan Province accounts for 45.1%, which is in a leading position. The company will continue to expand the sewage treatment business in Yunnan Province. The company has the only reclaimed water supply network in Kunming. Due to the stringent environmental protection policy, river replenishment and other reclaimed water demand continues to rise, the company is under construction of more than 13000 meters of reclaimed water supply network is expected to be put into production this year, it is expected that the company's reclaimed water supply will be significantly increased.
Expand the coverage of projects and increase the proportion of projects outside the province. The company's main production capacity is located in Yunnan, the business has covered 7 provinces and Laos, the domestic formation of Yunguichuan and Yangtze River Delta, Hunan and other advantageous areas. First of all, the company enters the market through mergers and acquisitions, transplants the advanced operation and management capabilities of Dianchi water, and makes the project as a local benchmark, which is recognized by the local government and residents, so as to obtain more local potential projects. The company has just announced the acquisition of Debeo Water and Hongyu Water shares, obtained sewage treatment projects in Leshan City, Sichuan Province and Liuyang City, Hunan Province, and entered the markets of Sichuan Province and Hunan Province. Leshan is a city rich in tourism resources and water resources. A good water environment can promote local tourism and economic development, and there are many potential water projects. Liuyang City is also more developed in industry and has more potential demand for water treatment. So the company strategically chooses the layout of these two cities. It is expected that the company will continue to increase the proportion of non-provincial projects through acquisitions, rich in tourism resources, high requirements for water environment, and economically developed areas will focus on the layout of the company.
Dianchi Lake governance core enterprises, seize the industry opportunity of comprehensive treatment of water environment. The company is the core enterprise of pollution control in Dianchi Lake. As the largest lake in southwest China, the average water quality of Dianchi Lake is Class V, which belongs to the heavily polluted lake and is the key area of national environmental control. According to the policy requirements of Kunming, the water quality of Dianchi Lake should meet the IV standard in 2020. It is expected that the investment in Dianchi Lake governance will reach 500 million within 5 years. The company is actively participating in the water environment control project in Dianchi Lake and is expected to use industrial funds for operation. The company has a greater opportunity to participate in the governance of "one lake, two rivers" in Kunming administrative region. Will also look for water environment control projects in Yunnan province or other areas.
The sewage treatment market in villages and towns and industrial water treatment are the growth points of the company's future performance. China's rural sewage treatment market is being policy-driven, and the company is expected to complete the installation of sewage treatment facilities in 800 villages under the jurisdiction of Kunming this year, generating 2000 million income, and completing the laying of sewage treatment facilities in all 2000 villages in Kunming within three years. Under the situation of stricter environmental protection policy, the sewage treatment facilities in some domestic industrial parks can not effectively carry out industrial wastewater treatment and can not meet the requirements of environmental protection. The company uses advanced water treatment technology reserves to find potential industrial wastewater treatment projects and accelerate the layout of industrial wastewater treatment market. It is expected that rural sewage treatment and industrial water treatment will be the growth point of the company's future performance.
Investment advice: the company's first-half revenue rose 13% year-on-year to 480 million yuan RMB, and net profit increased 2.4% to 130 million yuan RMB. As some of the company's newly acquired capacity is expected to contribute to profits in the second half of the year, we believe that the company's net profit for 2017 is expected to grow by about 10% to about 300 million yuan RMB. Based on the current share price of HK $2.99, the company's forecast PE for 2017 is 8.6 times, which is medium among the listed water companies in Hong Kong, and the company has technical and operational advantages. We believe that there is room for the stock price to rise.
Risk hint: the expansion of the company's water treatment capacity is slower than expected; the Dianchi Lake governance policy is slower than expected.