Event: BA'an Water released the 2018 semi-annual report, the company's operating income in the first half of the year was 630 million yuan, down 21.06% from the same period last year, and the attributable net profit was 121 million yuan, an increase of 0.66% over the same period last year, slightly lower than market expectations.

Comments:

First, the pace of municipal water sector slows down, industrial water and energy business performance is outstanding, seawater desalination business has declined a lot. In the first half of this year, the company's municipal engineering and sponge city business income was 1.09yuan and 116 million yuan respectively, totaling 225 million yuan, compared with 0.41 yuan and 445 million yuan respectively in the same period last year, totaling 486 million yuan. The slowdown in the pace of the municipal water treatment sector is a response to the unfavorable environment such as the contraction of macro credit and the tightening of PPP policies. The industrial water and energy businesses have performed well, including industrial water treatment income of 79 million yuan and equipment sales income of 69 million yuan, the sum of which is the same as that of the previous year. Thanks to the rapid promotion of the SPC project, the natural gas business achieved revenue of 230 million, an increase of 79% over the previous year. The revenue from the seawater desalination business is 10 million yuan, a sharp drop compared with 194 million in the same period last year. Although the first phase of the Cangzhou seawater desalination project has been basically completed, the water intake and pipeline network built by the management committee have not yet been completed, resulting in the implementation of the project basically at a standstill.

Second, the expense rate has increased significantly; the comprehensive gross profit margin has remained flat, while the municipal gross profit margin has dropped more. The sales expense rate of the company in the first half of the year was 4.6%, up 1.8% from the same period last year, mainly due to overseas market development and the increase of newly established companies; the management expense rate was 12.5%, up 3.8% from the same period last year; and the financial expense rate was 4.6%, up 3.3% from the same period last year. It is mainly due to the increased interest expenses of issuing bonds. The company's comprehensive gross profit margin in the first half of the year was 33.6%, which was basically the same as that of the same period last year, of which the gross profit margin of sponge city and municipal works decreased significantly by 2.64% and 5.19% respectively; although the gross profit margin of seawater desalination dropped significantly by 35% to 15%, it does not have reference significance due to the small volume of income; the balance of gross profit margin benefited from the significant contribution of the natural gas business in the first half of this year, and the gross profit margin was as high as 50%.

Third, the cash flow deteriorates, the amount of cash flow generated by business activities continues to be negative, and the gap expands rapidly. In the first half of the year, the company received 376 million yuan in cash for selling goods and providing services, which was significantly lower than that of 472 million yuan in the same period last year, and the cash-to-cash ratio dropped to 60.0% from 68.2% in the same period last year. The net cash flow of operating activities is-101 million yuan, which is larger than that of the same period last year-19 million. This is mainly due to the fact that the SPC natural gas project, which mainly contributes to income, and the comprehensive transformation of the first ring water system in Caoxian County are in the construction period, and the project construction funds paid by the owners are reduced compared with the same period last year. The company's accounts receivable was 430 million yuan, an increase of 19.1% over the same period last year, accounting for 68.4% of revenue.

Fourth, resource integration, effective market expansion, equipment + engineering + operation diversification pattern is initially determined, there are plenty of orders on hand, and stable performance growth can be expected in the future. Since 2015, the company has successively acquired all or part of the equity of foreign high-tech companies in the water treatment industry, such as KWI, ItN, DHT, to introduce advanced technology, equipment and teams, precipitate technology, integrate all aspects of resources, and expand at home and abroad. Equipment + engineering + operation diversification pattern has been initially determined. This year, the company has successively obtained major projects at home and abroad, such as the comprehensive transformation of the first ring water system in Caoxian County, the construction of 50,000 cubic meters / day seawater desalination plant in Kazakhstan, equipment procurement of condensate fine treatment system, equipment procurement of desalination and desalination system, rain and sewage diversion pipe network in Sanli District of Hukou County, etc., reflecting the effectiveness of the company's resource integration and market expansion. The company rapidly promoted the solid waste business in the first half of the year and invested in the first phase of the solid waste disposal Center in Shikou Town, Dongying City, the 400 t / d sludge drying and Incineration Project in Nanxun District, and the dangerous waste disposal Center in Wudi County, Binzhou City. In addition, with the continuous outbreak of the industrial water treatment market under the stricter environmental protection in the future, the commissioning and operation of projects such as seawater desalination in Cangzhou, the commissioning of the SPC natural gas project and the continuous promotion of domestic gas business, as well as the macro-capital margin is loose in the second half of the year, municipal environmental protection is likely to pick up, the company's main sectors are expected to achieve rapid and stable growth. And the company has plenty of orders on hand, with 156 million EPC orders on hand by the end of June, and 3.4 billion new franchise orders this year, which will strongly support performance growth. The company is expected to achieve a performance of 2.2,2.5 and 300 million yuan in 18-20 years, corresponding to a valuation of 16.1 times that year, with a "prudent recommendation" rating.

Fifth, risk hints: the project schedule is not up to expectation, the risk of accounts receivable payback, and the political risk of overseas projects.