Summary of Investment

The first three quarters have seen rapid revenue growth and excellent cost control;

Non-public offering will be over, and the expected fixed-increase projects are confirmed;

Investment Rating

We`re optimistic about the company's integrated competitive advantage in the field of equipment + services and the breakthrough in the downstream sanitation industry chain. In 2017-2018, the company is expected to achieve a net profit of returns attributable to parent company of RMB 268 and RMB 355mn, and an EPS of 0.98, and RMB 1.3, which are equivalent to the PE of 28 and 21 times. The rating of "Buy" is given. (Closing price as at 20 Nov 2017)

The first three quarters have seen significant revenue growth.

In the first three quarters of 2017, the revenue of Longma Environmental Sanitation reached RMB2.268 billion, up by 44.54% yoy, and the net profit of returns attributable to parent company was RMB191 million, up by 26.03% yoy and up by 26.41% after non-post deduction, equivalent to a basic EPS of RMB0.72 (+28.57%). The increase in revenue was mainly from the increase in equipment sales and environmental sanitation services. Specifically, Q1/Q2/Q3 contributed revenues of 6.66/7.98/8.04 and net profits of 0.644/0.63/0.64, respectively. The contribution of each quarter was stable.

Gross margin and net profit margin declined to certain degrees.

In terms of profitability, the overall gross margin was 27.1%, down by 4.77% yoy. The period cost rate was 14.4%, down by 2.75% yoy and the net profit margin was 8.44%, down by 1.24% yoy. In terms of finance, accounts receivable in the first three quarters increased by 97% to RMB135 million as compared with the beginning of the year, and receipts in advance decreased by 75.35% to RMB32 million as compared with the beginning of the year. Net cash flow from operations amounted to RMB-308 million mainly due to the schedule of customer appropriation, including sanitation departments and sanitation service companies. According to the historical operations of the company, the fourth quarter is the peak period of the payment and the expected annual operating cash flow will return to normal growth.

In Q3, the environmental sanitation service orders accumulated at a faster pace.

Since 2017, the annual contract value of environmental sanitation service projects won by the company has been RMB298 million with the total contract value of RMB4.378 billion, showing a substantial increase from the total contract value of RMB407 million in mid-2017. As of October, the annual service contract amount of on-hand environmental sanitation services in the company has been RMB828 million with the total contract value of RMB9.964 billion. Among them, the company has taken over the operations of Xiagang Area Project in Xiamen, Haimen Area Project in Jiangsu Province and Longhua District Area Project in Haikou. Under the strategic guidance of the environmental protection equipment + environmental sanitation services, the company accelerates the access to environmental sanitation orders by virtue of equipment, technology and other advantages, and the continued growth of results in the future is guaranteed.

Non-public offering will be over, and the expected projects are confirmed.

In September 2017, the company's non-public offering of shares was approved. The raised fund was RMB730 million for the comprehensive sanitation equipment configuration, sanitation service research and training base, marketing network construction and supplementary liquidity. Among them, special sanitation vehicles and sanitation equipment expansion projects, research and development center project have begun to be implemented. With the gradual landing of construction projects, it is expected that the operation scale, profitability and core competitiveness of the company will be further enhanced.

New breakthroughs are made in the area of waste sorting.

During the period, the company undertook Xiamen Community Waste Sorting Operation Project for the first time. The total amount of the project was RMB985,600 with a contractual period of 5.5 months, which started operation on July 15, 2017. This project is a pilot project of Xiamen Municipal Government in the field of waste sorting and also the first project of the company in the field of waste sorting. Based on this, the company is expected to add more such operations. In October, the company successfully won the bid for the urban-rural living waste collection and transportation as well as disposal PPP project in the Liuzhi Special District with a total investment of RMB375 million, including a cleaning area of 4.58 million square meters, a daily living waste transportation volume of 540 tons and a daily waste incineration volume of 500 tons. This is an important breakthrough made by the company in building a vertically integrated sanitation industry chain, which will help enrich the overall business type and accelerate the expansion of sanitation business.

Risk Warnings

Industry competition is intensified, and the gross margin is subject to continued downward risk;

The implementation of projects is below expectations;

Financials

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