Core views:

ZJMI Environmental Energy is the domestic leader in coal circulation and has actively transformed into an environmental protection and new energy service operator in recent years, turning coal trade and combined heat and power (CHP, or cogeneration) into its dual core businesses. As a domestic leader in coal trade, ZJMI has abundant upstream and downstream resources and impressive management efficiency, and its return on equity (ROE) has remained stable at more than 25% for many years. Meanwhile, as new projects are put into operation, we anticipate promising earnings growth from its already sizable cogeneration business. We assign 2.5x 2023E PB to derive a target price of Rmb23.2 and initiate coverage with a “BUY” rating.

Abstract:

Engaged in coal circulation and CHP, ZJMI has gained a foothold in Zhejiang with business expansion across China. ZJMI is mainly engaged in coal circulation and CHP. Although the revenue and profit has recorded fluctuations in recent years due to the impact of coal prices, they have maintained a secular growth. From 2017 to 2021, the CAGR of operating revenue and attributable net profit (ANP) was 16.4%/31.2%, respectively. As of 1H22, Zhejiang State-owned Assets Supervision and Administration Commission (SASAC) controlled 42.6% of ZJMI’s controlling stakeholder ZJMI Zhongda via several state-owned shareholders and is the actual controller of the Company.

ZJMI has built a strong presence in coal circulation with a focus to improve operation quality. As the leading domestic player in coal circulation, ZJMI has maintained growth in coal shipment in recent years, which topped 68mt in 2021, accounting for 3% of the total coal consumption in China. Affected by high coal prices, its revenue from coal circulation increased significantly, with an annualized growth of 106.5% in 2021. ZJMI has stable long-term upstream and downstream customer bases in coal circulation, boding well for the Company’s sustained robust growth. With small-sized companies gradually exiting the industry, MZJI’s market share is likely to expand further.

The sizeable growth of CHP drives up performance. Under the guidance of CHP policies, ZJMI has built regional barriers in the vicinity of its plants in Zhejiang, which warrants a stable downstream customer base. Driven by policies such as “coal and fuel prices move in lock steps”, “power generation based on heating capacity and all power being connected to the grid”, the gross profit margin (GPM) of the CHP business remained around 30%. At the same time, the synergies generated by coal circulation and CHP can effectively contain the impact induced by the fluctuations in coal prices on ZJMI’s overall performance. With the impending capacity commissioning of new projects, such as ZJMI Jinyi and ZJIM Shanying, in 2022 and 2023, we expect the Company’s heating capacity to rise by c.20%, which will further enhance its performance.

ZJMI focuses on “carbon reduction” to refuel growth. In recent years, ZJMI has stepped up the R&D of ultra-low emission generators. Its Tongxiang Taiaisi project, as Jiaxing’s key carbon reduction project, has obtained a specific subsidy of Rmb20mn. Meanwhile, ZJMI has been proactively expanding the environmental and renewable energy business. It established ZJMI Zhongda and launched roof distributed photovoltaic (PV) projects in multiple thermal power plants. Among them, the Tongxiang Taiaisi project has already been connected to the grid on May 31, 2022, which laid sold foundation for the Company’s transition towards renewable energy and the launching of the second growth curve.

Potential risks: Sharp fluctuations in coal prices; changes in CHP-related supporting policies; disappointing progress of new projects; extreme situations such as production accidents.

Investment recommendation: We estimate ZJMI’s 2022E-24E net profit at Rmb1.045bn/1.171bn/1.279bn (+3%/12%/9% YoY), equivalent to EPS forecasts of Rmb1.87/2.10/2.29, and corresponding to 9.2x/8.2x/7.5x PE and 2.1x/1.9x/1.6x PB at the current price. With the average comps valuation of 2.3x 2021 PB for comparable companies of Hangzhou Cogeneration Group (605011.SH), Fuchunjiang Environmental Thermoelectric (002479.SZ), Shimao Energy (605028.SH) and Shanxi Coal Int’l (600546.SH) in coal circulation and CHP as a reference, we assign 2.5x 2023E PB to derive a target price of Rmb23.2 and initiate coverage with a "BUY" rating.