Company Profile

Shanghai Safbon Water Service Co., Ltd. （300262: SZ） sells system integration equipment, andprovides related technical services, installation and construction services to water treatment system.

Event:

Shanghai Safbon Water Service won bid for a USD 30.98 million worth water supply improvementproject of the Kathmandu Valley in Nepal.

Comment:

The successful bid for the first water service program in South Asia represented a breakthroughin pursuing “going out” strategy.

The company won bid for a USD 30.98 million worth water supply improvement project of theKathmandu Valley in Nepal. The project, which can treat 68,700 metric tons of water per day, willoperate in DBO mode （design-build-operate） for five years before being transferred to the tenderofferor. As a government-sponsored project financially supported by Asia Development Bank, it notonly marked the penetration into Nepal water service market after 16 years'suspension, but alsorepresented the company's first DBO-mode water service project in South Asia. As a majoraccomplishment of the company's overseas market expansion, this project can offer valuable lessonsfor further expansion.

Pay attention to the estimates gap brought by overseas M&A.

The company had a series of overseas M&As.

（1） KWI: the global leader in DAF （Dissolved Air Flotation） technology.

（2） Purchased 21.6% stake of Swiss Water Service（3） Acquired stake of ItN, a listed German company that boosts world-leading nano ceramicultrafiltration membrane technology

（4） We should pay attention to the estimate shorts of overseas M&A.

In an era of energy reform when seawater desalination is going to grow explosively, thecompany takes initiatives to boost seawater desalination business.

We believe that with the reform of electricity marketization, the seawater desalination industry willachieve explosive growth. Other companies, such as China Communications Construction and BeijingTop Resource Environmental Protection Technology, are striving for integrating seawater desalinationbusiness. With the help of KWI, Swiss Water Business and ItN, the company gained seawaterdesalination technology and access to the market. In terms of domestic projects, seawater desalinationproject （treat 100,000 metric tons of water per day） in PPP mode in Cangzhou is being installed;Previously the company signed CNY830 million worth agreement on the seawater desalinationproject（treat 100,000 metric tons of water per day） in PPP mode in Xianrendao Island Energy andChemical Industry Zone of Yingkou City. Collaborated with Qingdao Water Service and GuizhouWater Service, the company has set up a CNY 1 trillion worth seawater desalination industry zone inLangu, Qingdao. The future technology integration and market expansion are still worth marketexpectations.

Water Service Project in PPP mode: Led by Liupanshui Project, the company expanded morePPP projects.

The impending accomplishment of Sponge City Project in Liupanshui has a strong demonstrationeffect. Now the company is proactively proceeding with the project in Taian, Shandong and is lookingfor more expansion in other cities. Safbon won the bid for the CNY 65 million waste water treatmentand pipe network PPP project in Longlou Town and Tongguling Tourism and Resorts Zone ofWenchang City, Hainan Province. The project was listed one of the third batch of pilot PPP project.

The company is creating new growth driver of dangerous waste. The company has signedseveral dangerous waste treatment burning projects, including the chemical dangerous wasteburning project

The company has offered restricted stock unit to employees. The Restricted Stock and Stock OptionIncentive Draft Plan the company issued before said that a total of 5,602,800 shares of restricted stockand stock option will be granted to 36 officers and key employees, accounting for 1.5% of total sharesand 1.3533% of total share, which translates into 5,055,000 shares, will be granted for the first time.

（1） 622,000 shares of restricted stock will be granted to 4 key officers at the price of CNY 6.96 pershare without grant reserve. （2） 4,980,800 shares of stock option will be granted to 36 key officers andthe initially granted stock is no more than 4,433,000 shares. The stock option will be exercised atCNY 14.08 per share. （3） the evaluation will last from 2016 to 2018: based on the earnings of 2015,the net profit after deducting the non-recurring growth rate should exceed 85% in 2016, 190% in 2017and 308% in 2018 respectively, and ROE should be no less than 9%, 10% and 11% respectively. Thevesting condition of the rest part: based on the profit of 2015, the net profit of 2017, 2018 and 2019 isno less than 190%, 308% and 420% respectively and ROE is no less than 10%, 11% and 12%respectively. By far the Restricted Stock Incentive Plan has been officially granted at the price ofCNY 6.96 per share.

Investment recommendations: Reiterate “Buy”。 We made our earnings forecast for the company atCNY 180 million in 2016 and CNY230 million in 2017. The current market cap is CNY 7.8 billion.

We believe: 1） With the development in seawater desalination, sponge city in PPP mode and theestablishment of new business in hazardous waste field, the market-beating earnings for Jan.-Sept.

may signify a beginning. 2） As restricted stock incentive plan was put into effect, senior officials werebound with profit; Demanding vesting conditions indicate high earnings which were secured bysufficient orders. 3） overseas expansion comes under way.4） Non-public offering has raised CNY 1.2billion, which may signify the accelerating growth of earnings and new orders. Reiterate “Buy”。

Potential Risks: Project proceeded slower than expected.