Dongjiang Environmental Protection’s (00895 HK or “DJEP”) 1H17 revenueincreased 20.0% YoY to RMB1,403 million. Net profit increased 6.8% YoY toRMB220 million. Results were slightly worse than expected, mainly due to anunexpected substantial decline in municipal waste treatment and disposal volumeand higher-than-expected decrease in profit margin of industrial waste treatmentand disposal business. Overall gross margin remained at 36.5% in 1H17. Sellingexpenses ratio was up 0.6 ppts YoY to 2.5%, administrative expenses ratio wasdown 0.2 ppts YoY to 13.6%.
　　Industrial waste recycling is expected to continue growing over the next two yearswith new capacity expected to be released in 2018. Industrial waste treatment anddisposal business remained as the largest revenue contributors, contributing37.2% of revenue. The Company is expected to benefit from the fast growthpotential in the market with more stringent regulations and increased incentives forpollution producers to pay for treatment services. We expect CAGR of industrialwaste recycling, waste treatment and disposal business revenue, andenvironmental engineering and services revenue to reach 24.5%, 29.6%, and49.6% in 2016-2019. The Company has sufficient financial resources to fuelgrowth over the next 2 years.
　　Our 2017-2019 EPS estimates are RMB0.498, RMB0.625 and RMB0.785,respectively. Being one of the market leaders, DJEP is likely to seize opportunitiesin the hazardous waste treatment market more easily compared to most of theircompetitors. Slightly revise down the TP to HKD14.50, representingFY17/FY18/FY19 PER of 25.1x/20.0x/15.9x. Maintain “Accumulate”.