1H17 core profit up 18%, behind consensus and our forecast.
　　However, cash-based EBITDA beat expectation, up 42% YoY
Performance was driven by the ramp-up of projects, while thepipeline looks sufficient for growth to continue
Maintain Buy with unchanged TP of HKD5.30
　　1H17 results: Dynagreen reported 1H17 profit of RMB195m, up 16% YoY. Wecalculate recurring earnings increased by 18% YoY, after stripping out one-offs suchas FX losses and impairment on receivables, etc, compared to our 23% YoY forecastfor full-year 2017. No interim dividend was declared, consistent with the past.
　　Higher quality growth, although earnings are behind consensusAlthough Dynagreen’s profit growth in 1H17 was behind consensus and our forecast,we do not view this as a negative sign because this was mainly due to the slownessof construction revenue （up only 3% YoY）， which is non-cash and recognized underthe accounting standard IFRIC 12 for BOT projects. The better-quality, cash-basedEBITDA from project operations beat our expectation with a strong 42% YoY growth,an acceleration from the 31% YoY in 2016. Supported by contribution from the Jixian and Huizhou projectswhich commenced in May 2016, municipal waste treatment volume was up 16% YoYto 1.75m tons in 1H17, while electricity generation was up 36% YoY.
　　Steady project pipeline to support future growthThe Jurong project entered trial operation in April 2017, which was delayed given thatconstruction took longer than expected. This increased Dynagreen’s wasteprocessing capacity by 9% to 8,550 tons per day （tpd）。 As of June 2017, Dynagreenhad five projects under construction. Ninghe and Bengbu projects are 90% and 70%completed and likely to commence in 2017. These two projects would take totalcapacity to 10,050 tpd （+18% HoH）。 In addition, Tongzhou project phase I was 45%finished, while Miyun and Shantou projects both kick-started in 1H17. On 1 Augustthe company signed a contract for Tongzhou project phase II with capacity of 1,700tpd. This provides solid visibility on revenue over the mid-term of 2019-21.
　　Maintain Buy with unchanged TP of HKD5.30We continue to like Dynagreen for its strong growth of cash-based project operationincome as a result of the continuous commencement of new projects. Despiteconstruction revenue showing a lower growth rate in 1H17, there is still good visibilityon the company’s project pipeline, given only 38% of its contracted capacity is inoperation. Dynagreen is currently trading at 9x PE and 1.2x PB, which is attractivecompared with other subsectors in the utilities space, such as environment （13-15xPE, 1.0-2.5x）， gas （8-16x PE, 0.8-2.9x PB） and clean energy （6-11x PE, 0.7-1.1xPB）。 We maintain our Buy rating with a TP of HKD5.30, after updating ourassumptions based on 1H17 results.
　　Valuation and risks
　　Valuation: Our unchanged target price of HKD5.30 is based on a DCF valuation using a riskfreerate of 2.5%, market risk premium of 6.0%, beta of 1.35, WACC of 7.2%, and no terminalgrowth. Our TP implies 29% upside and we maintain our Buy rating.
　　Downside risks: Slower-than-expected waste-to-energy capacity ramp-up; fewer-thanexpected new project wins; larger-than-expected project impairment losses.