In-line 1Q17 results
　　Dongjiang Environmental reported in-line 1Q17 results after market close on 27Apr. Net income reached RMB104m for 1Q17, up 23% yoy. Recurring profit（after stripping out RMB7.1m impact from government subsidy etc.） reachedRMB96.9m, up 36% yoy and representing 21% of DBe for FY17. We considerDongjiang’s 1Q17 results to be in-line as 1Q is usually a low season for thehazardous waste treatment business. Management expects Dongjiangearnings to grow by 20-40% for 1H17.
　　Details in the results
　　Revenue reached RMB676m, up 35% yoy. Specifically, revenue grew by 54%for industrial waste treatment, 52% for industrial waste recycling and by 148%for environmental engineering （driven by PPP projects）。 Industrial wastetreatment volume grew by over 60% yoy. Operating cashflow reachedRMB98.6m in 1Q17, up over 1300% compared to RMB6.9m in 1Q16, driven bythe company’s earnings growth and also cashflow improvement afterDongjiang disposed some of household appliance dismantling business.
　　Cost of debt to decline with new initiativesNet finance expense was only RMB23m in 1Q17, up 10% and onlyrepresenting 17% of DBe for FY17. Dongjiang issued RMB600m of greenbonds （4.9% funding cost） and RMB300m of Asset-Backed Securities （4.15%funding cost） in 1Q17, both offering lower cost than the company’s averagecost of debt of 5.9% in 2016. Net debt to equity was 38% by Mar 2017, downfrom 42% by Dec 2016 and presumably driven by the improvement inoperating cashflow.
　　Maintain Buy
　　We like Dongjiang on the strong capacity growth outlook for China’shazardous waste treatment market, its leading market position and potential toconsolidate the fragmented market, and the company’s transformation into anSOE with an employee share incentive scheme.
　　Valuation/Risk
　　Our DCF valuation is based on a 7.3% WACC, explicit cash flow to 2026E and2% TGR. Risks: fluctuation in China’s industrial activities, slower than expectedcapacity ramp-ups, lower than expected metal prices and lower than expectedmargins.