Accelerate to Purchase New Projects

In H2 of 2014, the company continued to expand its project scale in the purchase mode. It finished the purchase of 70% stock rights of Zhengzhou Shinnakasu in December with the processing capacity of 60 thousand tons. It purchased 80% stock rights of Pingdingshan Sewage Treatment Factory Stage 2 with the processing capacity of 130 thousand tons, as well as Laiyang Sewage Treatment Factory with the processing capacity of 20 thousand tons. By the end of January 2015, the sewage treatment scale of the company had reached 2.47 million tons, increasing by 42.5% yoy. Among that 2.08 million tons had been put into operation, increasing by 44.9% yoy. The management of the company reveals that the company plans to complete the purchase target of about 1.5 million tons before the end of 2015. We think the purchase mode can make the company enlarge the project scale rapidly, but the accompanying capital pressure may be increased. We will mainly pay attention to the financing method and cost changes of the company in the future.

Emphasize Technological Research and Development

The company has established Environmental Nano-engineering Technology Institute together with Shenzhen Institute of Tsinghua University, and the main research directions are the membrane technology sewage treatment and digitized waterworks system. Both the two technologies are the development trend of the future sewage treatment industry. The management of the company also reveals that the business in the future will be expanded to industrial sewage and sludge treatment and other fields. We think although it won`t affect the operation situation of the company in a short period, a more diversified business mode is beneficial to the development of the company as well as the promotion of the valuation of the company at the same time from a long-term perspective.

Valuation

As a privately owned enterprise of sewage treatment, which is in the leading ranks in the industry, the company has always kept being undervalued at relatively low levels. The company has kept expanding all the time by means of acquisition followed by the subsequent new operation of the acquired business. The speed of expansion has been relatively fast but the mode of expansion has been relatively simple and unitary. The company will also move gradually to the other areas of sewage treatment in the future. From the long-term viewpoint, we expect that the company will perform well. We shall maintain the target price for the company at HK$4.05, and upgrade the company to ¡§buy¡¨ rating.

Financials

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