Summary of Investment

-The operation is steady, and the profitability has improved;

-The valuation is lower than that of the rivals, and the margin of safety is abundant;

Investment Rating

The Company continued to operate steadily in the first three quarters. We predict the Company's net profits of 2017 and 2018 will reach RMB 616/738 mn, respectively; EPS will be RMB0.8 and RMB0.96, respectively, equivalent to 20.1/16.7 P/E ratio of 2017/2018; The target price is given at RMB18.4, with a accumulate rating. (Closing price as at 7 Nov 2017)

Results in the First Three Quarters Meet Expectation. According to the 2017 Q3 result report, Grandblue Environment recorded a revenue of RMB3.06 billion, with a yoy increase of 13%. The net profit attributable to the parent company was RMB545 million, with a yoy increase of 26.13%. The net profit attributable to parent company excluding non-recurring items was RMB497 million, with a yoy increase of 18.76%, equivalent to basic EPS at RMB0.71, which was RMB0.56 over the same time period of last year. The net profit growth exceeded revenue growth, mainly because the water damage control in water supply business achieved certain results, the electric charge and other costs declined, the power generation efficiency of solid waste disposal was further enhanced, and financial costs declined year on year.

The period cost declined, and the net profit margin increased. In respect of profitability, the overall gross margin was 32.2%, down by 1.8 ppts year-on-year. The period cost rate was 12.04%, down by 2.7 ppts year-on-year, among which the sales expense rate was 1.63% (-0.13%),the administration expense rate was 5.99% (-1.15%) and the financial expense rate was 4.43% (-1.43%). The decline of the period cost caused the net profit margin to increase by 1.74% to 19.23% year on year.

In respect of finance, the book capital was RMB123,6 million, an increase of 5.73% over the beginning of this year, and the receivable was RMB402 million, an increase of 53.6% over the beginning of this year, mainly because some of the new projects of the waste business were not included in the subsidy directory, therefore renewable energy subsidies were not recovered, and government settlement progress was postponed. The advance payment was RMB88 million, a year-on-year increase of 295%, mainly because the advance payment for purchasing the solid waste engineering and gas increased. The net amount of the operating cash flow was RMB893 million, a year-on-year increase of 11.2%.

The business operation was sound, and the operational efficiency was improved. In respect of solid waste business, the extension project (Huangshi phase II) (400 tons/day) was operated at full load in the first half of 2017; the new project (Dalian project) was basically completed, which is expected to be put into operation in the second half; the Company won the bid for PPP project of Kaiping solid waste industrial park (900 tons/day). At present, the projects put into operation reached 113,00 tons/day, and the projects under construction and preparation reached 9,450 tons/day, including Foshan Nanhai waste industrial park phase III project (1,500 tons/day) and Shunde solid waste industrial park project (3,000 tons/day).In the case of limited production capacity increase, the Company promoted the further improvement of operational revenue by strengthening cost management and enhancing the generating efficiency of solid waste business.

During the period of water supply, each subsidiary company carried out water loss control work and achieved remarkable results. The total water loss rate and water supply cost of the Company reduced. The new pipe network operation business of sewage collection in Nanhai District was added in the sewage disposal business, thus the Company realized the whole industry chain operation mode with the integration of plants and networks. The Company plans to complete the reconstruction of the subordinate 16 sewage disposal projects in 2018. The water quality will be improved to the A class of national standard level after the completion of the reconstruction, and itis expected to contribute to the improvement of the water environmental control capacity and operational efficiency of the Company.

Risk Warnings

Gross margin continues to go downward;

The solid waste expansion is below expectation.

Financials

Click Here for PDF format...