Summary of Investment

-The capital strength is significantly enhanced after the accomplishment of private placement.

-Sanitation business has expanded across the country, developing fast and having strong drivers of performance.

-The company accelerates to take PPP projects, increasing the order backlogs to support the future performance.

Investment Rating

As the industry leader, the company has completed the vertical industry chain layout from upstream environmental protection equipments to midstream sanitation services and then to downstream solid waste disposals. As a result, we are optimistic about the endogenous growth under the whole industry layout. Meanwhile, after the accomplishment of private placement, it is hopeful to see the acceleration of the extensional extension and the trend of continuous growth of the performance. We expect the company's 2017-2018 net profit to reach RMB1364/1703million respectively; EPS to be RMB1.33/RMB1.67, respectively; the corresponding target price to be RMB41.2, rated "Accumulate". (Closing price as at 23 Oct 2017)

The interim result was steady: the operating revenues of Tus-Sound accounted to RMB3912 million, representing a year-on-year increase of 14.63%. The net profit attributable to parent company stood at RMB493 million, representing a year-on-year increase of 12.3%, and the corresponding EPS was RMB0.52. Specifically, the growth of environment protection equipment and sanitation service significantly accelerated, and contributed to the primary income increment, while amounted to RMB904 million and RMB715 million, respectively, representing a year-on-year increase of 23.5% and 139%. To some extent, the business of municipal construction and renewable resources decreased, with their revenues of RMB1163 million(-10.65%) and RMB822 million(-0.66%), respectively. The business of water services and solid waste disposal grew steadily, reaching incomes of RMB207 million(+14.4%) and RMB83 million(+32.3%).

Gross margin and net profit margin remain stable. the overall gross margin and net profit margin were 30.49%(+0.57%) and 12.66%(-0.21%), respectively, almost maintaining steady. The gross margin of environment protection equipment was the highest among all, decreased by 3 ppts year-on-year to 50.84%. The gross margin of solid waste disposal business decreased greatly because of amortization amount and loan interest, down by 20.47% year-on-year to 18.25%. The gross margin of renewable resources business increased by 13.88% year-on-year to 18.25% because the overall purchase price of waste household appliance declined.

Period cost rate rose by 2 ppts year-on-tear to 15.3%, among which administration expenses rate was 8.86%(+1.34%); selling expenses rate was 1.33%(+0.17%); and financial costs rate was 5.11%(+0.53%). Operational cash flow was RMB-574 million, which was worsened comparing with RMB-367 million in the same period of last year, and among the cash flow, the cost of staff salary increased greatly.

The company accelerates to take PPP projects: the company speeded up to take PPP projects in recent years. According to the statistics, since 2017, the company has signed almost 20 new PPP projects and invested almost RMB20 billion in PPP projects (including Cooperation Framework Agreement). Big orders of PPP projects that the company have includes Xingping(RMB1.246 billion), Wuhai(RMB1.15 billion), Huanggang(RMB5 billion), Xianning(RMB1.583 billion), Liaocheng(RMB2 billion), Pingxiang(RMB2.25 billion) and Heilongjiang(RMB2 billion), etc. With the constant exploitation of PPP business and the gradually realization of PPP orders, we expect to form a solid foundation for the long-term growth of the company's performance.

The Bid of Xiong`an New Area Project: in September, the company won the bid of urban and rural sanitation integration project in Anxin county, Xiong`an New Area, which includes sweeping, cleaning and trash pickup of main roads and the two sides in 9 towns and 2 countries in Anxin county. The service period is three years and the annual contract amount is RMB32 million. The company has already taken up sanitation projects in Anxin county as early as 2013, 2014 and 2016. The winning project will help the company to form its regional competitive advantages of the integration urban and rural sanitation, and to consolidate achievements of projects in Xiong`an New Area. The demonstration effect of this project is remarkable.

The share price goes into a healthy growth channel after accomplishment of private placement: private placement was accomplished in August, 2017. 167 million shares were added, whose issuing price was RMB27.39 per share. It raises RMB4589 million and is expected to market and circulate in August, 2020. The factors that suppress the company's stocks will be removed after the accomplished of private replacement. The added funds will also help to reduce the financial costs and relieve the debt-to-assets ratio rising year by year, and will provide financial support for projects exploitation and expansion.

Risk Alert

Projects exploitation is lower than expected;

Projects at hand undergo slowly;

Market competition becomes more fierce;

Downside risk of gross margin.

Financials

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