The revenue and profit in the first half of the year increased significantly compared with the same period last year: the company achieved revenue of 867.7 million yuan in the first half of the year, a sharp increase of 82.7 percent over the same period last year, and a net profit of 80.2 million yuan in the same period, an increase of 70.4 percent over the same period last year. The basic profit per share is about 0.067 yuan. The company's business has grown significantly, on the one hand, due to the stable development of the traditional water business, and on the other hand, the company's solid waste business.

The traditional water business has excellent performance and expanded processing capacity: the revenue of the water business in the first half of the year was 759.2 million yuan, an increase of 59.9 percent over the same period last year, and the overall gross profit margin was 32.4 percent, which was basically the same as that of the same period last year. The slight drop in gross profit margin is mainly due to the decrease of 10 percentage points in the gross profit margin of water supply business compared with the same period last year, due to the lower unit price of water supply in Qingzhou project, which lowers the overall gross profit margin of water supply. With the commissioning of completed projects and the gradual construction of new projects, we expect that the traditional water business will continue to provide the company with steady growth in revenue and profits.

After the consolidation of solid waste business, the profitability will gradually appear: after the consolidation of solid waste business, it will contribute 108.5 million yuan in income in the first half of this year, accounting for 12.5%. At present, the company has seven solid waste projects with a designed annual capacity of 967000 tons, six projects have been put into use, and there is still one project with an annual capacity of 255000 tons to be put into operation. In addition, the current gross profit margin of solid waste business is 28.9%. It is expected that in the future, with the expansion of production capacity, the proportion of high gross margin business will increase, and the gross profit margin of solid waste business will further rise.

To expand new projects, the debt has increased: the company completed the acquisition of 65% of Future InternationalGroup and 100% of Harbin Guohuan Medical solid waste disposal Center in January, 75.51% of Harbin Yunshui Group in April and Galaxy NewSpring Ltd. 50% in July. Through active mergers and acquisitions, the company has expanded new water supply, sewage and solid waste treatment projects and improved the handling capacity of each business. In order to pay the consideration for M & A projects and replenish the working capital, the company increased its liabilities accordingly, and the short-term borrowing in the first half of the year increased by 2.6 billion yuan, an increase of 250% over the same period last year. In addition, the company also replenishes long-term capital by issuing medium-and long-term bonds and signing agreements with banks, totaling about 1.86 billion yuan. At present, the company holds more cash, the recovery of accounts receivable is normal, and there is long-term capital as a guarantee, there is little pressure to repay in the short term.

Valuation and rating: we expect the company's annual net profit in 16-17-18 to be RMB 412, 475 and 577 million, respectively, and EPS to be RMB 0.34, 0.40 and 0.48 (HK $0.39, 0.46 and 0.56 respectively). The company is operating steadily and growing rapidly, and we have given the company a "overweight" rating of HK $5.85 corresponding to its target price of HK $5.85 in 2016.

Risk hint: the market competition is more fierce, the recovery of accounts receivable may not meet expectations.