On 16 February 2024, the Hang Seng Index*** announced the results of the quarterly review of the Hang Seng Index Series as at 31 December 2023. According to Zhitong Financial APP, 32 ** were excluded from the Hong Kong Stock Connect Index this time, among which the head enterprise of hazardous waste treatment - Conch Environmental Protection (00587) was impressively listed.
Looking back at the conch environmental protection ** chart, the reason why the company was excluded from the Hong Kong Stock Connect is very intuitive. In 2022, the company's stock price rose to 15 at the beginning of its listing1 Hong Kong dollar, and then, the stock price started a long ** downward trend. Recently, the share price of Conch Environmental Protection once fell to 102 Hong Kong dollars, the largest decline of more than 93% from the historical high, the company's current market value is only a little more than 2 billion Hong Kong dollars, far from the peak market value of nearly 30 billion Hong Kong dollars.
It is difficult to increase income and profits
Zhitong Financial APP learned that Conch Environmental Protection was split and listed from Conch Venture in March 2022, and the current actual controller is Conch Cement. The history of Conch Environmental Protection can be traced back to Conch Entrepreneurship's investment in Yaobai Environmental Protection in 2015 and the establishment of Wuhu Haichuang Environmental Protection in 2016. Conch Environmental Protection's business mainly uses cement kiln synergy technology to provide industrial solid and hazardous waste treatment services.
According to the Frost & Sullivan report, in 2020, Conch Environmental Protection was the largest waste disposal service provider in China. In the same year, the company was also the largest service provider in China for the treatment of industrial solid waste and hazardous waste using cement kiln co-treatment technology, accounting for approximately 21 percent of the total market share in terms of disposal capacity in operation7%；In terms of disposal volume, it accounted for about 31 percent of the total market share3%。
Unfortunately, after the listing of Conch Environmental Protection, the "innate advantage" of relying on Conch Cement did not allow the company's valuation to achieve sustained value growth. One of the main reasons for this is that the company has fallen into a situation of "difficulty in increasing revenue and increasing profits".
Conch Environmental Protection's financial report shows that the company's revenue has increased from 39.7 billion yuan (RMB, the same below) increased to 169.8 billion yuan, with a compound annual growth rate of more than 623%；During the same period, the net profit attributable to shareholders of the company increased from 23.4 billion yuan, an increase of 57.9 billion yuan, with a compound annual growth rate of 323%。In 2022, the company achieved a year-on-year increase in revenue of 185% to 17300 million yuan, net profit attributable to shareholders fell 4425% to 3600 million yuan. In the first half of 2023, the company's revenue reached 97.1 billion yuan, a year-on-year increase of 1179%, and net profit attributable to shareholders fell 197% to $200 million.
The growth rate of the industry has declined, and the pressure of competition has intensified
According to Zhitong Financial APP, conch environmental protection in recent years has appeared "difficult to increase profits" or even "increase income without profits", one of the main external reasons is the slowdown in the growth of the industry.
According to the Frost & Sullivan report, China's total hazardous waste disposal increased from 32.2 million tons in 2015 to 83.9 million tons in 2020, with a compound annual growth rate of 211% and is expected to increase to 138 by 20259 million tonnes, with a CAGR of 106%。The revenue of the cement kiln co-disposal industry increased from 600 million yuan in 2015 to 4.8 billion yuan in 2020, with a compound annual growth rate of 516%, and is expected to increase to 12.1 billion yuan in 2025, with a compound annual growth rate of 20.0%.3%。According to Huatai**'s calculations, the scale of the hazardous waste treatment market (centralized treatment by third-party licensed enterprises) will reach 10.1 billion tonnes at a CAGR of 74%。
On the other hand, in the process of development of the hazardous waste market, the supply side is gradually surplus. From 2016 to 2022, the compound annual growth rate of licensed hazardous waste treatment capacity reached 187%, and the annual production capacity of hazardous waste treatment corresponding to the license will reach 1. by the end of 20227.5 billion tons. Huatai ** believes that although the growth of qualifications has slowed down in recent years, the hazardous waste treatment industry as a whole is still facing the dilemma of overcapacity. It is expected that the supply-side adjustment may be inevitable, and before the adjustment is basically completed, the treatment will be ** or continue to be under pressure.
Zhitong Financial APP noticed that the competitive pressure brought about by the oversupply of the hazardous waste treatment industry is reflected in the fundamentals of Conch Environmental Protection. Taking gross profit margin as an example, in 2018, the gross profit margin of Conch Environmental Protection was as high as 7721%, and the gross profit margin slipped to 52 in the first half of 202362%。
Conch Environmental Protection's 2023 semi-annual report shows that the company's business mainly covers three major sectors: industrial hazardous waste disposal services, industrial solid waste disposal services, and comprehensive utilization of resources. Among them, the general hazardous waste and industrial solid waste disposal services in the industrial hazardous waste disposal service business are the company's main gross profit**.
In the first half of 2023, the gross profit margin of the general hazardous waste disposal services business was 5581%, down 25 percentage points, mainly due to the intensification of market competition, Guangdong, Jiangxi and other provinces of hazardous waste disposal; The gross profit margin of the industrial solid waste disposal services business was 5141%, down 101 percentage point, mainly due to the fierce competition in the contaminated soil business, the lack of factory entry led to a decrease in revenue. Overall, in the first half of 2023, the average price of the company's comprehensive disposal of hazardous waste was 1,157 yuan tons, a year-on-year decrease of 193%, down 129%。
Will there be a time when the fundamentals will bottom?
Under the influence of factors such as the weakness of hazardous waste treatment, the stock price of Conch Environmental Protection continued to "find the bottom", reflecting the changes in the company's fundamentals. In the future, whether the company's fundamentals can hit the bottom** is a topic of concern for investors.
First of all, from the perspective of industry growth prospects, China's total hazardous waste disposal is still growing steadily, which contains structural growth opportunities. According to Huatai** in 2023, the cement kiln co-disposal market is expected to grow at a compound annual growth rate of 140%。In the first half of 2023, the comprehensive disposal of conch environmental hazardous waste will reach 5460,000 tons, a year-on-year increase of 345%, of which the co-disposal of cement kilns increased by 43 year-on-year6% to 4860,000 tons.
In terms of hazardous waste treatment**, Huatai believes that in view of the fact that many large hazardous waste treatment enterprises have lost money, it is expected that hazardous waste treatment** has basically bottomed out after experiencing a continuous decline from 2018 to 2022. However, until the supply side completes the reshuffle, it is equally unlikely that hazardous waste treatment will be significantly reduced in the short term.
In this context, the cost control ability of conch environmental protection is worth paying attention to. It is understood that Conch Environmental Protection adopts the co-disposal process of cement kiln, and other disposal methods (such as incineration) have obvious cost advantages. Therefore, when other peers lose money, Conch Environmental Protection can still maintain profits. In the first half of 2023, benefiting from the release of scale effects brought about by good management and control and improved utilization, the company's collaborative disposal cost decreased by 18 year-on-year3% to 500 yuan tons, the cost advantage of cement kiln co-disposal project is further consolidated.
In addition, in the fierce competitive environment, some disposal enterprises with high energy consumption, high pollution and high cost using traditional processes may gradually withdraw, while disposal enterprises with co-disposal processes as the core are expected to gradually occupy a more important market position. This will help Conch Environmental Protection to seize the opportunity of industry consolidation. Conch Environmental Protection said in its 2023 interim report that in terms of hazardous waste and oil sludge disposal business, the company will consolidate its core competitive advantages, seize the opportunity of industry integration, carry out project mergers and acquisitions in a timely manner, and further improve market network coverage.
As of the first half of 2023, Conch Environmental Protection has put into operation and constructed 66 environmental protection projects in 19 provinces, municipalities and autonomous regions across the country, involving a treatment scale of about 731670,000 tons per year (excluding projects submitted for approval and not yet under construction), of which 63 projects are under construction80,000 tons per year.
In the short term, the abundant project reserves are conducive to the company's expansion of scale benefits and consolidation of cost advantages, but at the moment of the downward trend of hazardous waste treatment, the favorable conditions for listing are expected to help the company's fundamentals, but there may be a long way to go to achieve a reversal.