The cost was controlled well, and the gross profit was basically stable.

In 2016, the company's revenue jumped by 8.56% yoy to RMB8.024 billion; the net profit excluding non-recurring items attributable to the parent company increased by 18.52% yoy to RMB0.663 billion. Basic EPS was RMB0.62, increasing by 19.23% yoy. The profits were basically in line with its expectations. The results increased quarter by quarter. In Q4, results reached RMB3.09 billion, and the net profit attributable to the parent company was RMB0.234 billion. In 2017 Q1, the company's result positively increased. The revenues increased by 0.25% yoy to RMB1.143 billion; the net profit excluding non-recurring items attributable to the parent company grew by 3.58% yoy to RMB75 million.

Specifically, by expanding development space, the vacuum cleaner project, desulfurization and denitration project kept steady growth, which were the main sources of the result growth. The revenues were RMB4.266 billion (+6.2%) and RMB3.33 billion (+14.57%), respectively. The gross profit margins were 25.1% and 21.4%, respectively. The share acquisition of desulfurization catalyst business from joint venture parties was completed. And the revenue soared by 54.88% to RMB73 million.

In respect of cost, the increase was 8.94%, slightly higher than the increase of revenue. The gross profit margin decreased slightly by 0.27%, which was mainly affected by the decline of that of real estate and overseas EPC project. During the period, the expense was RMB1.031 billion; the expense ratio was 12.85%, slightly up by 0.38 percentage point over last year. The net profit reached 8.37%, mainly affected by the one-off non-operating revenue of RMB137 million.

The contracts in hand were abundant; the foundation of sustainable development was solid.

The amount of orders in 2016 was RMB10.2billion, including RMB5.5 billion of vacuum cleaning, RMB3.2 billion of desulfurization and denitration. As the end of the period, the amount of the orders in hand was RMB16.1 billion. The overall bid rate of the project was 44.9%. In 2017 Q1, the amount of orders was RMB2.7 billion. At the end of the period, the amount of orders in hand was RMB17.5 billion. Facing the situations of excess capacity of flue and gas treatment in power industry and fierce competitions among peer companies, the future business is confronted with many difficulties. However, the company's excellent technology and brand image, the abundant contracts in hand, the strong executive force and the active layout in non-electric projects lay solid foundations for the sustainable development in the future.

Sunshine Group purchased Longking at a premium, showing its great value.

In June 1, the company announced that Sunshine Group and its persons acting on concert purchased Eastright Investment at a price of RMB3.67 billion and indirectly held 17.17% of the company's stocks. Each share was nearly RMB20, nearly 60% higher than RMB12.77 before suspension. The premium mainly reflects the company's current business level, brand and technological research and development capabilities, profitability and the ability of valuation. Longking Co., Ltd has long been committed to the field of controlling air pollution. The purchase of Sunshine Group aims to working in environment protection industry and creates a comprehensive empire of environment protection. We believe that the purchase by Sunshine Group at a premium reflects its exploration and recognition of the company's value. With the experience of the Group's capital operation, the company will usher in a new development. Furthermore, Sunshine Group will increase its holdings of RMB0.5 billion to RMB1 billion of the company's stocks in the next year, showing its confidence to the long-term development of the company.

Valuation and Rating

At present, the project of flue and gas treatment in electricity industry is in the peak of implementation. On the contrary, there is still a broad market space in non-electricity industry. Based on technology, brand image and first layout, the company is expected to further increase the market share. We predict that the company's revenue in 2017-2018 will reach RMB8.7 billion and RMB9.4 billion, respectively. The net profit will be RMB0.72 billion and RMB0.81 billion, respectively. The EPS will be RMB0.68 billion and RMB0.76 billion,respectively. We will give the target price of RMB18.4 and the rating is Buy. (Closing price as at 26 June 2017)

Risk Warnings

Upward price of raw materials;

Risk of refunding;

Risk of macro-policy;

Fierce competition in the industry;

Financials

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