Summary of the report:
The transition period has passed and new projects are back on the growth track. In the past two years, the competition in the urban sewage industry has intensified, the company has not chosen to take new projects aggressively, the expansion of the project scale has been stagnant, and the company's performance has hardly improved. During this period, the company gradually transformed to the comprehensive management of water environment and rural water as the main business development direction. In 2016 and this year, the company has obtained three water environment control projects and two rural water projects, which provide impetus for the company's future development on the basis of the steady growth of the original urban water business. The Environmental Protection Industry Fund will also be launched in 2018 to improve the company's financial position.
This year's income has increased significantly, and the performance is about to be reversed. As of April 30 this year, the company's project size totaled 3.719 million tons, an increase of 31% over the same period last year, and 645000 tons of projects under construction, a substantial increase of 84.3% over the same period last year. The company's new project construction is progressing smoothly, and the company is also adding performance momentum through equity acquisitions. The company's revenue was affected by the "revenue change" in 2016, and this year's tax policy will not affect the company's revenue. We expect that the construction income and operating income of the urban sewage business will increase by more than 20% this year, and the PPP business revenue will increase by about 2 times, reaching about 27% of the total revenue, and this proportion will continue to increase in the next few years.
Valuations are already attractive. At present, the valuation of the company is very low, PE is only 8.8 PB and PB is only 0.83, compared with the industry leader, North Water Control (371.HK), the discount is 47.3% and 74.6%. In the past two years, the company has experienced a period of transition and its performance growth is very low, so the valuation has been suppressed. Now that the transition period is over, the performance has returned to growth. We believe that the discount level of valuation will decline. Major shareholders have increased their holdings four times in a row since May this year, with a cumulative increase of 5.5 million shares and a total cost of 9.24 million Hong Kong dollars. Recently, the company's share price has fallen continuously, and the continuous increase of major shareholders also shows confidence in the future development of the company. In the future, the company will also choose to buy back at the right time.
Profit forecast and investment rating. We estimate that the company's EPS for 2017-2019 will be 0.21, 0.26, 0.31 respectively, corresponding to 6.8, 5.5, and 4.1 times PE, respectively, with a 12-month target price of HK $2.33, giving the company a "highly recommended" rating for the first time.
Risk hint: the progress of the project is not as expected, and the competition in the industry is intensified.
