Investment highlights: Acquisition of 50% of Galaxy Spring's shares: The company announced that its subsidiary, Yunnan Water (Hong Kong) Co., Ltd., plans to acquire Galaxy SpringPte from Mitsui & Co., Ltd. at a cost of 100 million US dollars. Ltd's 50% equity. Galaxy Spring Group has 24 water supply, sewage treatment and reclaimed water plants in China. The total treatment capacity of its construction reaches 1,540,000 tons per day. Currently, the water plants in operation have treated 920,000 tons per day, and the processing capacity of projects to be built or constructed is 620,000 tons per day. The company had total assets of $473 million and net assets of $273 million in 2015. Through the acquisition of the company, Yunnan Water has further expanded its water business, increased its water supply and sewage treatment capacity, and is expected to have an internal return on investment of 11%. Expanding water services outside the province: Galaxy Spring's business in China is mainly distributed in economically developed coastal provinces and the Yangtze River Basin, including Zhejiang, Jiangsu, Shandong, Tianjin, Chongqing, Hunan, etc. Yunnan Water has been actively expanding its business outside of Yunnan Province in recent years. It is already doing business outside of 10 provinces including Shandong, Anhui, Jiangsu, and Xinjiang. After the completion of this acquisition, the layout of the water supply and drainage network along the eastern coast was initially formed to ensure steady and continuous revenue growth in the future. Based on the water industry, building a comprehensive service provider for the urban environment: Yunnan Water is a PPP model company jointly funded by Yunnan City and Bishuiyuan. Its main business covers a full range of water industry chains, including raw water supply, tap water supply, sewage treatment, construction and equipment sales. Based on the water industry, it is actively expanding solid waste treatment business and carrying out industrial hazardous waste treatment and medical waste treatment projects. In the positive profit forecast released on July 25, the company stated that due to the development of the solid waste treatment business and the acquisition of other projects, the net profit of the 2016 interim report increased significantly year-on-year. After completing this acquisition of Galaxy Spring, we expect the company to achieve significant revenue growth in the future. Valuation and ratings: Since this acquisition cannot be completed in the near future, the company's profit forecast does not take this acquisition into account and maintains the previous forecast. The company's net profit for the year 16/17/18 is expected to be RMB 4.05/4.76/595 million, and EPS is RMB 0.34/0.40/0.50 (HK$0.40/0.47/0.59), respectively. The company's operating conditions are stable and growth is rapid. We gave the company 14 times P/E in 2016, corresponding to the target price of HK$5.60, and maintained an “increase in holdings” rating. Risk warning: The sewage treatment and water supply industry is at high risk of being affected by policies, and policy changes may have an impact on the company's performance; industry concentration is low, and competition is intense.