Interpretation of New Stocks in the US Market | With high debt and prominent profit pressure, how will the largest domestic waste home appliance recycling platform Zero Carbon Environmental Protection break the deadlock?

On October 18, the official establishment of the new central enterprise China Resources Recycling Group Co., Ltd. marked a milestone event in the development history of China's resource recycling industry. This not only signifies the management's high emphasis on resource recycling but also injects new vitality into the future development of the industry.

Against this industry backdrop, the largest domestic waste electrical appliance recycling platform, Zero Carbon Environmental Protection, has accelerated its journey towards a U.S. listing. According to Zhitong Finance APP, on October 30, Zero Carbon Environmental Protection updated its prospectus for the fourth time, less than five months after it first submitted the public version of the prospectus to the SEC on June 12.

The latest version of the prospectus shows that Zero Carbon Environmental Protection is applying for a listing on NASDAQ under the code "CZTI." It expects to issue a minimum of 2.5 million ADS (representing 20 million ordinary shares) and a maximum of 3.75 million ADS (representing 30 million ordinary shares) in this IPO, with an issuance price range between $12.80 and $16.00 per ADS.

Both the number of shares issued and the price range are relatively large, which may indicate a certain gap between the market's valuation of Zero Carbon Environmental Protection and the company's own estimated level. From a performance perspective, Zero Carbon Environmental Protection's results are disappointing.

In the first half of 2023, although Zero Carbon Environmental Protection's revenue grew by 34.32% year-on-year to 4 billion RMB, its net profit fell by 78.1% year-on-year to 2.825 million RMB, hovering near the breakeven point. In the first half of 2024, although the net loss narrowed by 56.3% year-on-year to 8.509 million RMB, revenue decreased by approximately 17.6% to 1.799 billion RMB.

It is worth noting that Zero Carbon Environmental Protection explicitly stated in the prospectus that after the completion of this public offering of ADS, a total of 750,000 ADS held by selling shareholders can be sold, indicating that this portion of shares is not subject to a lock-up restriction. Based on the minimum issuance of ADS, these 750,000 ADS account for approximately 3.35% of the company's total equity.

"1+4+6" Product Service Matrix Boosts Industry-Leading Business Scale

As the domestic operating entity of Zero Carbon Environmental Protection, Shenzhen Aibo Green Environmental Protection Technology Co., Ltd. (hereinafter referred to as "Aibo Green") was established in March 2016, which means that Zero Carbon Environmental Protection has been deeply engaged in the recycling industry for over eight years. In 2023, Zero Carbon Environmental Protection recycled over 11 million waste electrical appliances, making it the largest waste electrical appliance recycling platform in China.

The reason it can achieve an industry-leading market scale is due to Zero Carbon Environmental Protection's independent development of the "1+4+6" product service matrix, which empowers each recycling link precisely through 1 platform, 4 applications, and 6 solutions, constructing a digital recycling ecological chain from information integration, door-to-door recycling, centralized sorting to environmentally friendly dismantling.

The "1 platform" refers to the BoLv Smart Middle Platform, which can simultaneously connect the supply side, recycling side, sorting side, and dismantling side, building a smart system with full-link data interconnection and business compatibility. The "4 applications" correspond to the important links in the four recycling businesses: information collection, recycling team, recycling network, and trading system.

In terms of information collection, Zero Carbon Environmental Protection has a recycling information connection integration platform called "BoLv ShouShou Mini Program," which can be used on Alipay and WeChat. As of June 30, 2024, this mini program has over 134,800 registered users, of which approximately 61,800 are sales personnel and 73,000 are end consumers, thus providing sufficient recycling information for waste electrical and electronic products.

It is worth noting that as of December 31, 2023, the number of registered end consumers on this mini program was 35,000, which means that in just six months, the number of end consumers increased by nearly 40,000.

Regarding the recycling team, Zero Carbon Environmental Protection has a data management and information distribution recycling end app called "BoLv ShouShou APP." This program also allows third-party registered recyclers to connect with suppliers through Zero Carbon Environmental Protection's online renewable resource recycling system, bid for and accept recycling orders. After the order is completed, Zero Carbon Environmental Protection will deduct an information service fee ranging from 5 to 10 yuan. As of June 30, 2024, there are over 34,000 registered recyclers on this APP.

In terms of the recycling network, as of June 30, 2024, the recycling stations cooperating with Zero Carbon Environmental Protection have covered more than 500 cities nationwide (including county-level cities), totaling approximately 3,700. In addition, Zero Carbon Environmental Protection has established partnerships with about 237 transfer stations and sorting centers, most of which are operated by third-party operators, while only one sorting center is directly operated by Zero Carbon Environmental Protection. Moreover, Zero Carbon Environmental Protection's warehousing sorting intelligent management assistant "BoLv Sorting Center APP" can achieve functions including receiving goods, inventory counting, and sales management, while also enabling remote monitoring and recording real-time inventory statistics. Currently, this application is being used in recycling stations, transfer stations, and sorting centers cooperating with Zero Carbon Environmental Protection.

To enrich business scenarios and provide diversified solutions for customers, Zero Carbon Environmental Protection has launched six customer solutions, namely producer extension solutions, old-for-new service solutions, dismantling enterprise recycling system solutions, enterprise recycling solutions, home platform collaboration solutions, and recycling partner solutions. The six solutions cover the entire chain from source registration, door-to-door recycling, logistics transfer, warehousing sorting, second-hand circulation, to environmentally friendly dismantling, while providing personalized services tailored for B-end enterprises and third-party platforms.

According to the prospectus, Zero Carbon Environmental Protection's recycling mainly includes two modes: one is that recyclers communicate with individual suppliers or traditional recycling stations via phone to collect items on-site and transport the collected renewable resources to recycling stations, transfer stations, or sorting centers Secondly, individual suppliers or corporate suppliers will directly transport their recycled resources to recycling stations, transfer stations, or sorting centers. In this case, Zero Carbon Environmental Protection will procure waste household appliances and waste metals from these recycling stations, transfer stations, and sorting centers, selling the waste household appliances to downstream second-hand markets and dismantling and disposal companies, and supplying the waste metals to downstream scrap metal processing companies and steel mills.

Therefore, the sales of black metals and waste household appliances collected offline are the main source of revenue for Zero Carbon Environmental Protection. In 2023, its offline revenue accounted for as much as 99.8%, with revenue from waste household appliance sales accounting for 37.1% and revenue from waste metal sales accounting for 62.6%.

Weak downstream demand leads to revenue decline, low profitability results in high debt

From a performance perspective, Zero Carbon Environmental Protection's performance is not ideal. In 2023, Zero Carbon Environmental Protection's revenue grew by 34.6% to 4.01 billion yuan, mainly driven by the two major businesses of waste household appliance and black metal recycling. During the reporting period, the black metal recycling volume increased from about 70 tons to about 90 tons, driving the revenue growth of the black metal recycling business by 23.2% to 2.51 billion yuan. At the same time, the expansion of the recycling network increased the number of waste household appliances collected from about 7 million units to 11 million units, driving the revenue growth of the waste household appliance recycling business by 64.7% to 1.487 billion yuan.

However, the net profit in 2023 fell by 78.1% to 2.825 million yuan, mainly due to rising product costs and increased listing expenses, which drove total marketing expenses to grow by 35.2%, outpacing revenue growth; coupled with increased interest expenses and other expenditures, which eroded net profit.

Entering the first half of 2024, Zero Carbon Environmental Protection's total revenue decreased by about 17.6% year-on-year to 1.799 billion yuan, mainly due to reduced downstream demand for non-ferrous metals and waste household appliances. Among them, the recycling volume of non-ferrous metals fell from about 510,000 tons in the same period of 2023 to 490,000 tons, while the average price per ton decreased by about 3%, leading to a 7.4% decline in revenue from non-ferrous metals to 1.332 billion yuan during the reporting period. On the other hand, the number of waste household appliances collected during the reporting period decreased from about 5.5 million units in the same period of 2023 to 3.5 million units, with an average price decline of 4% year-on-year, resulting in a significant drop in revenue from waste household appliances by 37.7% to 460 million yuan.

In the first half of 2024, despite a significant drop in revenue, Zero Carbon Environmental achieved a net loss reduction of 56.3%. This was mainly due to the reduction of subsidies to contractors during the reporting period, which led to a year-on-year decrease of 58.4% in performance costs, thereby releasing profits, which is basically consistent with the extent of the net loss reduction.

The performance of Zero Carbon Environmental in the first half of 2024 may have surprised some investors. After all, since 2024, the country has vigorously promoted equipment renewal policies, leading to a wave of appliance upgrades. According to data from the National Bureau of Statistics, in the first half of the year, national air conditioner production increased by 13.8%, refrigerator production increased by 9.7%, washing machine production increased by 6.8%, and color TV production increased by 0.4%. This indicates that the equipment renewal policy has achieved results. Why hasn't Zero Carbon Environmental benefited from this?

The key reason lies in the fact that Zero Carbon Environmental's revenue comes from the sale of recycled products. However, due to the concentrated replacement of old appliances and metals brought about by the equipment renewal policy, the supply of old appliances and scrap metals has significantly increased, leading to a decrease in selling prices. Coupled with insufficient downstream market demand, Zero Carbon Environmental's old metals and appliances have fallen into a predicament of both volume and price decline.

Based on this, it can be anticipated that the difficulty of performance improvement for Zero Carbon Environmental in the short term is relatively high, and there are also numerous potential challenges facing its business operations, including the following aspects: First, high customer concentration.

According to the prospectus, in 2022 and 2023, revenue from the top five customers accounted for 58.5% and 54.8% of Zero Carbon Environmental's total revenue, respectively. By the first half of 2024, this figure further increased to 59.3%, with the top two customers accounting for 24.4% and 15% of revenue, totaling nearly 40%. If demand from major customers weakens, it will impact the business operations of Zero Carbon Environmental.

Second, the market is highly fragmented and competitive.

According to a CIC report, China's renewable resource recycling industry is highly fragmented, with over 90,000 companies operating in this sector in 2022. The market is filled with various participants, including individual recyclers, online recycling platforms, appliance manufacturers implementing Extended Producer Responsibility (EPR), e-commerce platforms, and recycling platforms established by dismantling factories.

Zero Carbon Environmental recycled over 11 million old appliances in 2023, becoming the largest old appliance recycling platform in the country, but its market share is only 1.04%, highlighting the fragmentation and intense competition in this market. If market competition continues to intensify in the future, it will put greater pressure on Zero Carbon Environmental's operations.

Third, low profitability and high debt.

Although Zero Carbon Environmental's business system leans towards a light asset operation model, in terms of the essential indicator of profitability, its current role is more akin to that of a reseller, with low business value content. The company is still hovering around the breakeven line Although Zero Carbon Environmental Protection has begun to layout for higher profitability service income, there has been no effect so far, and the revenue proportion is negligible.

Due to intense market competition, low business value content, and weak profitability, the expansion of Zero Carbon Environmental Protection's business scale requires a simultaneous increase in liabilities. As of June 30, 2024, Zero Carbon Environmental Protection's total assets were 522 million, and total liabilities were 519 million, with a debt-to-asset ratio close to 100%. Furthermore, out of the total assets of 522 million, accounts receivable reached as high as 242 million, indicating low business value content and relatively weak competitiveness, which may bring about impairment risks.

In summary, facing weakened downstream demand, Zero Carbon Environmental Protection may struggle to achieve impressive performance in the short term. From a long-term perspective, the company faces multiple potential operational challenges, including intense market competition, low business value, weak profitability, high debt, and high customer concentration, which may suppress the listing valuation of Zero Carbon Environmental Protection to some extent