Note: Shao Xiao is a senior analyst in the environmental protection group of Guotai Junan Research Institute, and the following is a summary of the industry based on the 4.7 p.m. fixed income dialogue.
Key takeaways:
We believe that as carbon neutrality accelerates the rise in carbon prices, the most favorable segments of the environmental protection industry are waste incineration and renewable resources. The waste incineration industry has significantly benefited from the promotion of carbon neutrality, and the transformation of leading companies has also opened up new growth space for them. It is recommended to have steady growth of the main business and active layout of the new energy business, as well as green bonds with high growth certainty of the main business performance and low price and valuation of the main business.
Gu Yige: The "double carbon" of the two sessions in 2021 was written into the government work report for the first time. At this year's two sessions, the government work report proposed to orderly promote carbon peaking and carbon neutrality, implement the carbon peak action plan, and promote the low-carbon transformation of energy. Promoting the reduction of carbon emissions is an important way to achieve the goal of double carbon, and the reduction of carbon emissions can be achieved through energy substitution, resource recycling, energy conservation and efficiency. There are many tracks favorable for carbon neutrality policies, such as wind power and photovoltaics that can replace traditional thermal power, coal power and other fossil fuel power generation methods, as well as lithium batteries that replace the power source of traditional fuel vehicles. We've talked about photovoltaics and lithium batteries in our previous fixed income talk industry shows, and today we're going to talk about the undervalued carbon neutrality track – investment opportunities in the environmental industry.
First of all, please ask Mr. Shao, the environmental protection industry has directly benefited from carbon neutrality, but looking back at the past few years, the stock price performance of the environmental protection industry is not so satisfactory, why is this? In addition, what is the current status of repairing the balance sheets of environmental protection companies?
Shao Xiao: In the past four years, the environmental protection sector has indeed seriously underperformed the market. According to our statistics, from 2018 to March this year, the Shenwan Environmental Protection Index, the Shanghai Composite Index and the ChiNext Index rose by -42%, -3% and 45% respectively, which is equivalent to the top 5 of environmental protection in more than 30 Shenwan first-class industries, and the valuation center of the entire sector is also moving downward. The current PE (TTM) of the Shenwan Environmental Protection Index is about 20 times, located at the historical 9% quantile, and the PB is located at the historical quantile of 16%, which is a very low position.
We feel that the core reason for the poor performance of the entire industry in recent years is the deleveraging in 2018. From 2015 to 2018, PPP became the mainstream business model of the entire industry. According to our statistics, the proportion of PPP models in the entire environmental protection full-caliber orders has increased from 20% to 85%. At that time, the general company's statements accumulated a large number of interest-bearing liabilities and intangible assets to be amortized, and after the deleveraging cycle in 2018 came, the implementation of a large number of PPP projects dragged down environmental protection companies and directly entered the passive statement repair cycle, and the balance sheet and income statement were in a process of alternating deterioration. In 2019, the Ministry of Finance further reduced the scope of application of the PPP model, requiring PPP to return to the operational standard. Since then, most environmental protection companies have completed the process of debt replacement by introducing mixed reform and state-owned enterprises. After several years of restoration, we have seen that most of the current environmental protection engineering companies have completed the process of preliminary repair of the statement, and the valuation center of the entire environmental protection engineering company is currently stable at about 10 times. Different from environmental protection engineering companies, environmental protection operation companies, mainly refer to waste incineration, which are still in the stage of steady expansion of the industry. We see that the intangible assets, fixed assets and construction in progress of the mainstream waste incineration companies in the industry are still growing rapidly, the entire industry is still expanding, and the industry valuation is probably between 10-15 times that of 2022, which is the current situation.
Gu Yige: In order to achieve the dual carbon target, it is necessary to accelerate decarbonization in industries with large energy consumption and emissions, such as electricity, transportation, and construction. Coal-fired power generation remains the largest source of carbon emissions on the continent, and under a carbon-neutral path, the power system needs to be deeply decarbonized. One of the most interesting things since the carbon neutrality target was proposed is that the country's carbon emissions trading opened on July 16, 2021, and the first batch of more than 2,000 power generation companies to be included in the transaction were the market. Next, please ask Mr. Shao to analyze the impact of double carbon targets and carbon emission trading on the environmental protection industry for us, and what segments of the environmental protection industry are beneficial?
Xiao Shao: Carbon neutrality policies and carbon prices have always been the focus of our tracking. On the one hand, the national carbon emissions trading opened in July 2021, and the first batch of power generation enterprises included in the first implementation cycle probably included more than 4 billion tons of carbon dioxide emissions, and we expect that other energy-consuming industries such as petrochemicals, chemicals, building materials, and steel will be gradually and orderly included. On the whole, the national carbon trading is in the process of speeding up; on the other hand, the EU has proposed a carbon border adjustment mechanism, which will take effect in 2026, and plans to tax the carbon-intensive products such as imported building materials and steel, creating a carbon barrier to the so-called Sino-European trade, which needs to be circumvented by the top-level system design of carbon neutrality in our country. At present, it seems that the border regulation mechanism will drive our country's carbon trading market to accelerate benchmarking with Europe. Because the current carbon price in Europe is about 70 euros per ton, but the domestic carbon price is only about 50 yuan, this gap is very obvious. So we expect our country's carbon prices to continue to exceed expectations in the future. We believe that as carbon neutrality accelerates the rise in carbon prices, the most favorable environmental segments are waste incineration and renewable resources.
Gu Yige: You just mentioned the waste incineration section, in fact, this is the most closely related to our lives, because we throw away a lot of solid waste every day. Like wind power and photovoltaics, waste incineration can also generate electricity, which is equivalent to turning waste into treasure. Can you tell us more about the investment opportunities in the waste incineration sector?
Shao Xiao: The investment logic of the waste incineration industry is summed up in one sentence: the waste incineration industry has significantly benefited from the promotion of carbon neutrality, and the transformation of leading companies has also opened up new growth space for them. Why does the industry significantly benefit from carbon neutrality? There are two main aspects.
First, in terms of industry space, we have observed that the growth rate of the entire waste incineration industry during the 14th Five-Year Plan period has slowed down significantly compared with the 13th Five-Year Plan. But the November 2021 U.S.-China Glasgow Declaration was released, which actually focuses on the measurement and reduction of methane, because landfill is a major artificial source of methane, and nearly half of our country's garbage is now disposed of by landfill. So if this emission reduction is achieved entirely by incineration instead of landfill, we estimate that it will add 150,000 tons of daily waste incineration power generation demand to the industry, which can raise the ceiling of the entire industry to a certain extent, which is about the aspect of industry space.
The second is about profitability and cash flow. We believe the CCER transaction will also significantly improve the profitability and cash flow level of waste incineration companies. If according to the carbon dioxide emission reduction of one ton of garbage, the industry average is about 0.3 tons, assuming that the transaction price of CCER is 40 yuan to measure, CCER transactions are expected to bring 12 yuan of incremental income to the incineration and disposal of tons of garbage, which will thicken the average revenue of listed companies in the industry by about 5%, and the profit is about 17%, which is still relatively significant. We mentioned earlier that the carbon price of the mainland is also expected to continue to rise, so the CCER price will also rise. We expect the CCER review to be restarted this year, and in this context, similar to other new energy operators, we believe that the CCER transaction will also significantly improve the profitability and cash flow level of waste incineration companies. In terms of profit forecasts, we expect the expected net profit growth rate of leading companies in 2022 to be between 25% and 30%.
In addition, we have also observed that many leading waste incineration companies this year are accelerating their transformation into a high-prosperity new energy track, which will also bring them the opportunity to revaluate their value. Their main transformation directions are also related, such as green power operations and the production of new energy materials. For example, Weiming Environmental Protection and Qingshan Group cooperated in the development of laterite nickel ore; China Tianyao and Rudong government cooperated in the development of sea breeze and photovoltaic, and introduced gravity energy storage technology; Wangneng Environment developed the power battery recycling industry; Shengyuan Environmental Protection cooperated with the Three Gorges To set sail to develop Fujian's sea breeze and photovoltaic projects; Longjing Environmental Protection introduced Zijin Mining to do flue gas treatment, tailings and photovoltaic wind power development and lithium battery new materials through the introduction of Zijin Mining through the fixed increase. Therefore, we are relatively optimistic about these waste incineration leading companies that are actively looking for growth momentum and looking for the second growth curve to transform new energy. In terms of recommended targets, we are now the first to recommend Longjing Environmental Protection, followed by China Tianyao, Wangneng Environment, Weiming Environmental Protection and so on. The above is the basic situation of the waste incineration industry.
Gu Yige: In addition to the waste incineration sector, the carbon neutral and favorable industries you just mentioned also include the renewable resources sector.
Shao Xiao: Renewable resources are also a subdivision that we are very optimistic about this year and are also closely related to carbon neutrality. To sum up, we believe that petrochemical renewable resources with the ability to export negative carbon taxes to the EU have entered a golden period of volume increases. There are several subdivisions of renewable resources: (1) We are most optimistic about the recycled oil industry, which is the so-called recycled biodiesel. It is benefiting from the constraints of EU policies, and the entire industry is in a state of long-term high price in short supply. The European Union is the world's largest consumer market for biodiesel, and the current consumption of biodiesel in the EU accounts for about 40% of the world's total. With the implementation of the EU's Renewable Energy Directive in 2021, the proportion of biodiesel blending in the European road transport industry will increase from 10% to 25%, and such demand will continue to grow in the next 10 years. We have calculated that based on the current global biodiesel production capacity, there will be a supply gap of at least 10 million tons per year in the entire European region by 2030. For gutter oil and waste oil-based biodiesel, because it contains higher carbon emissions, the carbon-saving effect will be more prominent, so the competitive advantage will be more obvious. The entire waste oil-based biodiesel has long been in short supply, so we believe that the current industry trend is good for the production of waste oil-based biodiesel.
(2) Recycled plastics industry, which mainly refers to recycled PET. PET is bottle-to-bottle high-end recycling, and the use of this high-end recycling replacement speed is beyond expectations, because global policies are actively promoting the recycling of plastics. PET is one of the most important recyclable plastics. One of the most important terminal products of global PET is also a relatively high-quality utilization product, which should be bottle-grade PET materials. Beverage companies are the most important end customers of bottle-grade PET, and we have calculated that many large companies around the world are actively committed to increasing the proportion of recycled plastics used. For example, the world's top four beverage companies have pledged to use more than 25% of recycled plastics in 2025, which is stimulating the demand of this industry, and we believe that the replacement speed of PET's bottle-to-bottle high-end recycling applications will also exceed expectations.
(3) Non-petrochemical recycling industries, such as recycled metals, are also expected to be valued in the process of gradually integrating carbon trading into the aforementioned high-energy-consuming industries and the implementation of the EU's Carbon Border Regulation Mechanism Act, not only in terms of production, but also in the pricing system will gradually integrate carbon price factors.
In terms of investment advice, Recycled Oil recommends excellent new energy, benefiting from Beiqing Huanneng and Jia'ao Environmental Protection. Recycled plastics are recommended for Triptych Hongpu, and the beneficiary target is Yingke Recycling. Recycled metals recommend high-energy environments, and the beneficiaries are Zhefu Holdings, China Re-capital, Grammy, etc. The above is the basic situation about renewable resources.
Gu Yige: There are many bond transfer targets in the environmental protection industry, can you pick a few of the positive stocks that you are more optimistic about?
Shao Xiao: Among the companies that issue and transfer bonds, we are more optimistic about Longjing Environmental Protection, Wangneng Environment, Green Power and Weiming Environmental Protection.
Longjing environmental protection: the company is the absolute leader in the flue gas treatment industry, solid waste and hazardous waste are also laid out. In terms of environmental protection, we believe that the company's traditional flue gas business still has sufficient market space, and the company's market share is still improving. At present, Longjing's orders in hand exceed 20 billion yuan, and these sufficient orders can ensure the company's sustainable development in the future. We expect Longjing to grow by about 15% per year in the main environmental protection business over the next three years. At the same time, the company is also actively transforming and introducing Zijin Mining as a war investment to cooperate in the development of wind power photovoltaic operation business. At present, the company has announced that it will cooperate in the development of wind power photovoltaic projects of not less than 3GW, and the transformation progress is beyond expectations. As an environmental leader with low valuation, the company has also ushered in the opportunity of value revaluation of new energy. We expect Longjing to have a net profit of about 1.05 billion yuan in 2022, corresponding to less than 11 times PE in 2022.
Wangneng Environment: The company is one of the leaders in the waste incineration industry, the current production capacity is 23,000 tons, there are 3,000 tons under construction, the main business is relatively stable. The operating cash flow of waste incineration is very abundant, and Wangneng has a cash flow of nearly 1 billion yuan per year. The company announced in January this year to acquire Zhejiang Lixin New Materials to do power battery recycling, and we believe that the company's transformation of the power battery recycling field has opened up the space for performance and valuation. It is expected that the company's net profit in 2022 will be 840 million, a growth rate of 30%, corresponding to less than 10 times PE in 2022.
Green power: One of the garbage incineration leaders under Beijing state-owned assets, the current order in hand is 55,000 tons, and 34,000 tons have been put into operation, which is equivalent to about 20,000 tons of reserve projects, and these reserve projects will probably be gradually released in the next two or three years to support the company's high performance growth in the next two or three years. We expect the company's performance growth rate in 2022 to be more than 40%, and these increases are mainly contributed by the operating income of the 7500 tons of new projects put into operation in 2021, and the construction proceeds of the 30000-ton projects that are still under construction. Its current valuation is also relatively cheap, corresponding to 12 times in 2022.
Weiming Environmental Protection: The company has always been the company with the highest valuation in the waste incineration industry, and at present, the company has invested 25,000 tons of production capacity, 50,000 tons in hand, and its reserve capacity is relatively rich. We have observed that in the context of 2021, many waste incineration companies have not received too many new projects, but Weiming is still actively expanding new projects through mergers and acquisitions. On the other hand, it may also be the bigger point of Weiming, Weiming and Qingshan Group to develop the business of new energy materials, which also opens up new growth space for him in the future. We expect Weiming to have a net profit of approximately 2.1 billion yuan in 2022, corresponding to 17 times PE in 2022.
Gu Yige: Next, from the perspective of bond transfer, I will talk about the investment suggestions for these bonds. The current price of Dragon Net Convertible Bond is 119.78 yuan, and the premium rate of the conversion is 27.26%. The price of Wangneng's bond transfer is 130.4 yuan, and the premium rate of the transfer is 9.2%. Both companies are leaders in the waste incineration industry, the valuation of the stock is relatively low, and on the basis of the steady growth of the main business, they have begun to actively layout the new energy business to further open up the growth space. The current strong redemption clause of Wangneng Bond meets 10/30 of the trigger days, so if the stock price continues to rise in the future, it is necessary to be vigilant against the risk of strong redemption of the bond. Although the 27% transfer premium rate is not low, but because its current stock valuation is low and the company's future growth expectations are strong, the development of a second growth curve will help the company's valuation center to increase. Therefore, on the whole, we still recommend Longjing to transfer bonds.
The price of the green-moving bond is only 112 yuan, and the premium rate of the conversion is 28.31%. It is a new bond listed on March 23, and there is no need to worry about the risk of strong redemption in the short term. Green Power is a state-owned waste incineration power generation enterprise, although there is no other business of the second growth curve, but its main business in the future performance of high growth of the certainty is larger, and the valuation of the main stock is relatively cheap, the current price of the bond is relatively low, and the premium rate of the equity transfer is at a low level in the same parity of the bond. Therefore, the green transfer bond is a transfer debt with both attack and defense, and we are also more recommended. Weiming Environmental Protection's 1.477 billion yuan bond conversion plan was approved by the shareholders' general meeting on February 19, 2022, and investors are advised to pay active attention to it.
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