Dongjiang Environmental Protection （00895 HK） revised down its 2018shareholders’ net profit guidance by 20% to be between RMB402 millionand RMB497 million. The Company attributed the downward revision tohigher-than-expected depreciation for new hazardous treatment and disposalfacilities and provision for impairment of acquired subsidiaries that do notmeet expectations and future business conditions.
We think the impairment on goodwill for acquired subsidiaries wasmainly due to the Company adopting a more prudent accountingapproach, as the Company’s announcement confirmed its operationwas in line with expectations. Although increased depreciation andimpairment negatively affected its shareholders’ net profit, those items arenon-cash items and do not affect operating cash flow.
We revise down EPS estimates by 16.9%, 15.8% and 14.6% to RMB0.536,RMB0.644 and RMB0.793 for 2018/ 2019/ 2020, respectively. With a moreconservative approach in accounting and more concrete accounting figuresin the income statement and balance sheet, the Company is likely to attractmore long-term investors. We set the TP at HKD9.70, or 15.9x/ 13.3x/ 10.8x2018/ 2019/ 2020 PER and 1.0x 2019 PEG. Maintain "Accumulate".