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GEM: Capacity release, achieving a diversified circular industrial pattern
Release time:
11 May,2015
In its recently disclosed "Investor Relations Activity Record", GEM Co., Ltd. stated that with the continuous improvement of policies and comprehensive utilization technologies, the profit margin of the scrapped vehicle business will become increasingly larger. The company's scrapped vehicle industry production capacity will be gradually released, forming a leapfrog development that runs parallel with its electronic waste, battery materials, and precious metal businesses.
Greenmei's latest Investor Relations Activity Record shows that as policies continue to improve and comprehensive utilization technology advances, the profit margin of the scrapped vehicle business will become increasingly larger. The company's scrapped vehicle industry production capacity will gradually be released, forming a leapfrog development that runs parallel with electronic waste, battery materials, and precious metal businesses.
The company stated that it has already built scrapped vehicle processing bases in Jiangxi, Wuhan, and Tianjin. Simultaneously, it is constructing a scrapped vehicle parts remanufacturing center in Wuhan, laying a solid foundation for the large-scale development of Greenmei's scrapped vehicle industry. Additionally, the company has also built the Xiantao Urban Mine Trading Market and the Jingmen Recycled Resources Trading Market, holds a controlling stake in Wuhan Xinhui, and established a scrapped vehicle recycling network, ensuring a sufficient supply of goods for the scrapped vehicle business. The mandatory scrapping of yellow-label vehicles has paved the way for the revitalization of the scrapped vehicle industry.
Greenmei's main business is the recycling and utilization of waste cobalt and nickel resources and electronic waste, as well as the production and sales of cobalt and nickel powder materials, copper tungsten, battery raw materials, and plastic wood profiles.
With the support of capital, Greenmei quickly expanded its layout nationwide, establishing a north-south artery and completing a circular industrial layout connecting north and south, and east and west. This resulted in a three-track driven model encompassing the recycling and utilization of waste batteries and cobalt, nickel, tungsten, and rare metal waste; the recycling and utilization of scrapped electronic appliances; and the recycling and utilization of scrapped vehicles. With the completion of the share increase and capacity expansion, Greenmei's comprehensive strength will be further consolidated.
Comments:
1. Further expansion of business through share increase, leveraging synergy effects. In February 2015, the company planned to issue RMB 3 billion in non-public offerings to nine specific objects in Shenzhen Zhongzhi, etc., with the number of non-publicly issued shares not exceeding 243 million shares, at an issue price of RMB 12.36 per share. The funds are intended for the acquisition of 49% equity in Kailike, 51% equity in Dewei Greenmei, and 65% equity in Zhejiang Dewei. The non-public offering has currently been accepted by the China Securities Regulatory Commission. Kailike is a well-known enterprise in the field of battery cathode materials and strategic cobalt metal; Dewei Greenmei is a leading enterprise in the field of waste tungsten recycling; and Zhejiang Dewei is a major producer and seller of cemented carbide. Through the above-mentioned equity integration, the company can, based on its overall business development strategy, streamline its business and service models, and fully leverage interactive synergy effects.
2. Production capacity release in three major sectors, achieving a diversified circular industrial pattern. In 2014, the company's main business evolved from a dual-track driven model mainly focused on the recovery of cobalt, nickel, tungsten, and rare metals, and electronic waste, to a diversified circular industrial pattern with three tracks: cobalt, nickel, and tungsten sector; electronic waste sector; and battery materials sector. In 2014, the three major business sectors generated a total gross profit of RMB 692 million, driving a year-on-year increase of 102.73% in the company's operating profit, reaching RMB 162 million.
Major cobalt and nickel supplier in the market. The company's ultra-fine cobalt powder and ultra-fine nickel powder have been successively identified as national key new products and have become high-quality brands recognized by the global cemented carbide industry. The domestic market share of ultra-fine cobalt powder has reached over 50%, and ultra-fine nickel powder has become one of the world's three major nickel powder brands, and a supplier to global giants such as Rio Tinto. In 2014, the company's cobalt, nickel, and tungsten sector achieved operating revenue of RMB 974 million, an increase of 14.45% year-on-year.
Rapid growth in electronic waste dismantling volume. In 2014, the company acquired Yangzhou Ningda and actively promoted capacity expansion projects such as the Jiangxi Greenmei Electronic Waste Recycling and Utilization Project, the Henan Greenmei Electronic Waste Recycling and Utilization Project, and the Wuhan Urban Mine Industrial Park Scrapped Vehicle and Electronic Waste Comprehensive Utilization Project. In 2014, the company's electronic waste dismantling volume grew rapidly, reaching a total of 6.78 million units, a growth rate of 195%; Jiangxi Greenmei's dismantling volume exceeded 2.3 million units, making it the largest single electronic waste dismantling enterprise in China. In 2014, the company's electronic waste sector achieved operating revenue of RMB 1.439 billion, a year-on-year increase of 41.22%; in 2015, the company aims to achieve a dismantling volume of approximately 10 million units of waste home appliances.
Release of battery material production capacity. The company's holding subsidiary, Kailike, is a well-known enterprise in the field of battery cathode materials and strategic cobalt metal. The tricobalt tetroxide it produces is sold to well-known downstream enterprises at home and abroad such as Samsung and Sanyou New Materials, and is a leading domestic producer of tricobalt tetroxide. At the same time, the capital investment project "High-performance nickel-cobalt-manganese ternary battery material project for power batteries" plans to achieve an annual production capacity of 5,000 tons of nickel-cobalt-manganese ternary power battery materials and 2,000 tons of battery-grade spherical cobalt hydroxide. After the completion of this project, the company will form a multi-variety and series of lithium-ion battery cathode raw materials, including tricobalt tetroxide, spherical cobalt hydroxide, and nickel-cobalt-manganese ternary materials, to meet the development needs of lithium-ion battery cathode materials.
In 2014, the company's battery material sales exceeded 10,000 tons, with a production capacity of 15,000 tons, accounting for over 25% of the Chinese market, making it the largest supplier of lithium-ion cobalt-based cathode raw materials in China. It achieved operating revenue of RMB 1.233 billion, a year-on-year increase of 24.82%; in 2015, the company plans to increase production capacity by over 90%.
Cooperation with Samsung, making it the number one supplier of tricobalt tetroxide. On April 9, 2015, the company, its holding subsidiary Kailike, and Samsung Group's subsidiary SDI signed a memorandum of understanding on lithium battery business. SDI agreed to do its utmost to make Kailike the number one supplier of tricobalt tetroxide. As the world's largest lithium battery manufacturer, the signing of this memorandum of understanding has opened up important sales channels for the company and its holding subsidiary Kailike's tricobalt tetroxide and ternary battery materials, promoting the development and expansion of Greenmei's international business, providing strong support for Greenmei to comprehensively improve its battery material technology level, and enhancing the profitability and core competitiveness of Greenmei's battery materials.
3. Strategic layout of the scrapped vehicle industry, expected production capacity release after 2016. In order to strategically lay out the scrapped vehicle industry, the company used raised funds and self-raised funds to add and increase investment in several major scrapped vehicle processing parks, including Wuhan, Tianjin, Jingmen, and Jiangxi. Among them, the main project of the Jiangxi Scrapped Vehicle Comprehensive Utilization Project has been completed and is undergoing commissioning, with some commissioning income. It is expected to enter normal production after July 1, 2015, and gradually generate profits; the Wuhan Circular Economy Park and the Tianjin Scrapped Vehicle Comprehensive Utilization Project have partially completed their main projects and are entering the equipment commissioning phase. It is expected to start generating scale and profits in 2016. At the same time, the 2013 "State Council's Opinions on Accelerating the Development of the Energy-Saving and Environmental Protection Industry" clearly proposed the promotion of scrapped vehicle technology, and the company's strategy is in line with national policies.
4. Exploring new recycling channels to enhance core competitiveness. On December 7, 2014, the company signed a strategic cooperation framework agreement with Shanghai Yueyi Network Information Technology Co., Ltd. (Aihuishou). The agreement stipulates that the company will be the preferentially designated environmental protection processing partner for Aihuishou in China, and Aihuishou will hand over the scrapped mobile phones, laptops, batteries, and other electronic products and accessories it collects to Greenmei for processing; on February 12, 2015, the company signed a "Strategic Cooperation Framework Agreement on Promoting the Leap-Forward Development of the Recycled Resources Industry" with Hubei Provincial Supply and Marketing Cooperative Federation, accelerating the integration of the recycled resources network and market, and carrying out investment cooperation in the recycled resources industry;
Collaborating with Aihuishou to integrate mobile phone recycling channels and online recycling networks. The company is one of the leading enterprises in China for the economic and large-scale recycling of electronic waste and waste batteries, while Aihuishou possesses extensive channels and an electronic platform for used electronics recycling. Aihuishou will hand over the scrapped mobile phones, laptops, batteries, and other electronic products and accessories it collects to Greenmei for processing, thereby integrating the company's mobile phone recycling channels. Simultaneously, the agreement facilitates the integration of both parties' business structures, promoting the company's transition from its existing multi-layered offline recycling network to establishing a nationwide online recycling network. This strengthens the company's raw material security system for the urban mining recycling industry, such as electronic waste, and further enhances the company's profitability and core competitiveness.
Cooperating with Hubei Supply and Marketing Cooperative to cultivate the regeneration of resources. Through strategic cooperation with the Hubei Provincial Supply and Marketing Cooperative, the company can achieve a major union of channels, resources, technology, and capital, providing sufficient raw materials for the company's rapidly expanding recycling industry scale and rapidly promoting the company's major development in the regeneration of resources industry in Hubei Province.
5. Fund expansion brings a vast market. In February 2015, the "Waste Electrical and Electronic Product Processing Catalog (2014 Edition)" issued by the National Development and Reform Commission and five other ministries added electric water heaters, gas water heaters, printers, copiers, fax machines, range hoods, monitors, mobile communication handsets, and single telephones to the list of electronic waste. The new catalog came into effect on March 1, 2016, greatly expanding the scope of electronic waste disposal fees, making producer payment of disposal fees a normal and sustainable income for electronic waste recycling and disposal enterprises, and bringing vast market space and continuous profit growth for companies such as the company that processes electronic waste. In 2014, the company's receivable fund subsidies increased by 354 million yuan year-on-year.
Maintaining the company's "buy" investment rating. Combining the company's production capacity deployment progress and judgment of the future economy, we predict that the company's EPS for 2015-2016 will be 0.37 yuan and 0.44 yuan respectively, corresponding to a dynamic PE of 53.24 times and 44.88 times respectively for the closing price of 19.62 yuan on April 20, 2015. Combining the industry's valuation level, we maintain the company's "buy" investment rating, with a target price of 22.11 yuan, corresponding to a 2015 PE of 60 times.
Main uncertainties. Significant fluctuations in raw material prices; fluctuations in downstream demand; changes in the implementation progress of the company's construction projects.
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