Dongjiang Environmental Protection’s (00895 HK or “DJEP”) 2016 revenue increased 8.9% YoY to RMB2,617 million. Net profit increased 60.5% YoY to RMB533 million. Excluding one-off items, core net profit increased 27.4% YoY to RMB379 million. Results slightly exceeded expectation. Overall gross margin increased 3.7 ppts to 36.1% mainly due to high revenue from high gross margin industrial waste treatment business. Administrative expenses ratio was up 1.0 ppt YoY to 13.0%, due to increased staff costs and recognition of loss of fixed asset disposal.
Industrial waste treatment and disposal business became the largest revenue contributor, contributing 32.2% of revenue and 44.6% of gross profit. The Company maintains its target of achieving 3.5 million tonnes of annual capacity in this segment. The Company also vigorously seeks to expand its geographical presence and EPC capacity in environmental engineering and services, targeting 20% of revenue generated from PPP in the future. We expect CAGR of of waste treatment and disposal business revenue and environmental engineering and services revenue to reach 42.5% and 57.4% in 2016-2019. Besides, the A-share incentive program has laid a bottom line for growth in 2017-2018.
Our EPS estimates of 2017-2019 are RMB0.557, RMB0.715 and RMB0.889, respectively. Benefiting from polices and a share incentive program, the Company should grow faster than its peers and we expect that the growth should be faster than 25%. Slightly raise the TP to HKD16.00, representing FY17/FY18/FY19 PER of 25.5x/19.9x/16.0x and 0.8x FY17 PEG. Maintain “Accumulate”.