Core viewpoints

As the only listed company controlled by Zhonglin Group, Yong'an Forestry actively participates in the group's "double carbon" strategy and effectively absorbs agricultural and forestry waste resources through the layout of biomass energy recycling projects. finished biogas and organic fertilizers have carbon sequestration value. With the resumption of the domestic CCER market, the company's biomass energy recycling projects and forestry carbon sequestration are expected to contribute incremental benefits.

Event

On July 18, the company issued the 2022 subscription prospectus (the second revised version), which intends to raise no more than 300 million yuan from indirect controlling shareholder Zhonglin Group for projects such as biomass energy recycling, with an issue price of 6.88 yuan per share.

Brief comment

First, the traditional main business: engaged in forest cultivation and comprehensive utilization, wood-based panel research, production and marketing and other business, the performance has improved significantly since 2022. Yongan Forestry was founded in 1994 and listed on the Shenzhen Stock Exchange in 1996. it is the first forestry comprehensive joint-stock enterprise in China. In February 2021, Zhonglin Group strategically reorganized Yongan Forestry, and the actual controller was changed from Yong'an SASAC to SASAC of the State Council. The company is mainly engaged in forest cultivation and comprehensive utilization, wood-based panel research, production and marketing and other business: 1) forest management: 2022 income of 438 million yuan, accounting for 57.9%, gross profit 70.1%, the company is now operating forest land of 1.28 million mu, located in Yong'an City, Fujian Province and the surrounding counties and cities. 2) Board household: the income in 2022 is 309 million yuan, accounting for 40.8%, and the gross profit margin is 6.81%. The company now has a fully imported fibreboard production line with an annual production capacity of 200000 cubic meters. In 2022, the company achieved an income of 757 million yuan (+ 49.4%), a net profit of 268 million yuan (+ 390.6%), an income of 138 million yuan (+ 37.3%) and a net profit of 54 million yuan (+ 382.1%) in the first quarter of 2023. The obvious improvement is mainly due to the contribution of the sale of standing wood to Zhonglin Sanming.

In order to solve the inter-industry competition with the controlling shareholders, the forest business will be sold gradually and is expected to be realized by 2026. There is a certain degree of inter-industry competition between the company's main business and Zhonglin Group. Since the reorganization in the past 21 years, in order to solve the problem of inter-industry competition, the company has adopted the sales model of gradually transferring forest assets and related forest land use rights to Zhonglin Sanming, a subsidiary of Zhonglin Group. A total of 5 Forest Resources transfer agreements have been signed from March 21 to December 22, involving a total of 518000 mu of woodland, with an overall transaction consideration of 1.1 billion yuan. By the end of 22nd, 321900 mu (90300 mu in 2021 + 231600 mu in 2022) has been allocated, involving an amount of 603 million yuan (172 million yuan in 2021 + 431 million yuan in 2022), while 196 million mu has yet to be allocated, involving a contract amount of about 500 million yuan. It is estimated that after the completion of the above five contracts, the company's operating woodland area will be reduced to 1.09 million mu.

Second, strategic transformation: the layout of biomass energy recycling projects, dry anaerobic fermentation technology is leading in China, and there is a broad space for the future. The company set up a wholly-owned subsidiary Zhonglin Xiongan in 2022 to improve the company's main business within the framework of the overall development strategy of Zhonglin Group, focusing on the resource utilization of agricultural and forestry wastes and the recycling of biomass energy. promote the company's industrial transformation and upgrading, the use of dry anaerobic fermentation technology, mining and utilization of agricultural and forestry organic waste resources, to create an economic and ecological dual cycle system. Build a resource recycling industrial system. As of July 2023, the company has laid out the first batch of biomass recycling projects in Zhuozhou, Ningjin, Guangping, Huojia and Dancheng, Hebei Province. Guangping project is expected to be put into trial production by the end of this year, and the other four projects are also expected to enter the trial production phase in batches next year.

1) Project funds: the estimated investment amount of a single project for the recycling of biomass energy is about 563 million yuan (160 million self-owned funds + 400 million financing), and the total investment amount of the five projects is about 2.815 billion yuan, of which, the company plans to issue no more than 43.6047 million shares (12.95% of the total share capital before the issue) to Zhonglin Group, the issue price is 6.88 yuan per share, and the capital raised is expected to be no more than 300 million yuan. It is used for biomass energy recycling project in Zhuozhou and Ningjin counties, and biomass fermentation microorganism R & D center project. Before the fixed increase (as of July 11, 2023), Zhonglin Group indirectly controlled the company through the joint venture company, controlling 23.81% of the voting rights of the company (19.27% held by the joint venture company and entrusted with 4.53% of the shares held by concerted actors). If calculated on the basis of the upper limit of the number of shares in the fixed increase, the holding proportion of Zhonglin Group and related actors will rise to 32.55% after the completion of this increase.

2) Core technology: dry anaerobic fermentation is adopted, which has advanced technical level and higher economic benefit. The company's project adopts horizontal plug dry fermentation process and complete set of equipment technology, and the main technical partner is Bio Science and Technology. According to the appraisal certificate of scientific and technological achievements issued by China Industrial Energy Saving and Cleaner production Association, and the technical evaluation report issued by the Biogas Science Research Institute of the Ministry of Agriculture and Village, the dry anaerobic fermentation technology and equipment owned by Bio Technology are at the international advanced level. Among them, the volumetric biogas production rate of yellow straw biogas fermentation is in the leading level in the world. Compared with the wet fermentation process commonly used in our country, the dry anaerobic fermentation technology has the following advantages: first, by mastering a new generation of bacteria, the conversion rate is higher, the gas production efficiency is 6 to 8 times higher than that of the wet process, and the production process does not need to add fresh water to avoid the problem of settling in the tank, there is no stagnation period for emptying the tank, and then realize 365 days of continuous operation. Second, dry technology reduces the demand for energy in its own operation, and the resulting energy will be completely sold in the market. Third, the raw material collection and storage mode of the dry method is simpler and easier to operate than the wet method, and there is no need to clean and dry the straw, which greatly improves the harvesting efficiency and the enthusiasm of farmers.

3) purchase and sales of raw materials: the supply of raw materials is guaranteed and the sales channel is being set up step by step. On the raw material side, the annual straw demand for a single project is about 210000 tons, and the company mainly adopts the following two ways to ensure the supply of raw materials: first, when selecting the project site, the straw output around the project site is required to be more than 500000 tons. ensure that the company's purchase accounts for no more than 40% of the local output, so as not to cause market supply and demand tension and price fluctuations. The second is to sign an agreement with the local government of the project site, requiring the construction of not less than 100,000 mu of straw off-field comprehensive demonstration area around the project, from the policy side to guide farmers to leave the field, so as to ensure the supply of straw. At the sales end, the company has begun to expand downstream potential customers and has signed strategic cooperation agreements on compressed natural gas supply with Hebei Jijie Energy Technology Co., Ltd. and Handan Huihua Energy Technology Co., Ltd. has signed a strategic cooperation agreement on organic fertilizer sales with Hebei Luyin biochemical Technology Co., Ltd.

4) estimation of investment return: it is estimated that a single project contributes 170 million in revenue and 36 million in net profit. The five projects contribute a total of 860 million yuan in revenue and 180 million yuan in net profit, among which the price of natural gas has a greater impact on the profitability of the project. The main products of biomass energy business are biological natural gas, bio-organic fertilizer and food-grade carbon dioxide, with an annual output of 2090 million square meters, 75000 tons and 22000 tons respectively, calculated at a unit price of 2.70 million yuan per square meter, 1410 yuan per ton and 420 yuan per ton. It is estimated that the annual income of a single project will be about 170 million yuan, profit 36 million yuan, net profit 21.0%, and project ROI about 6.4%. According to the company announcement, taking Baoding City and Xingtai City in Hebei Province as an example, the guiding price of pipeline natural gas for non-residents in the main urban area of Baoding City in August 2022 is 4.29 yuan per square meter, and the guiding price of pipeline natural gas for non-residents in the main city of Xingtai City from 2022 to 2023 is 4.80 yuan per square meter. The profitability of the project is positively related to the natural gas price and has greater performance flexibility.

Third, the restart process of CCER is accelerated, and the company's biomass energy projects and forestry carbon sequestration are expected to gain incremental benefits, which are expected to be dominated by biomass energy projects in the short term. On July 7, 2023, the Ministry of Ecology and Environment openly solicited public opinions on the measures for the Management of Voluntary greenhouse Gas Emission reduction Trading (for trial implementation), and the restart process of the CCER market moved forward this year, focusing on supporting renewable energy, forestry carbon sinks, methane emission reduction, energy conservation and efficiency, and other areas conducive to reducing carbon and increasing sinks. According to the Management measures, the voluntary greenhouse gas emission reduction project should have authenticity, uniqueness and additionality, in which additionality means that the implementation of the project has overcome the obstacles of finance, financing and key technology. and compared with the baseline scenario determined by the relevant methodology, it has additional emission reduction effect, and the company's forestry carbon sequestration and biomass energy emission reduction projects all have greenhouse gas emission reduction effect. And the investment cycle is longer and the return on investment is low (biomass energy project ROI is about 6.4%), so it is expected to apply for CCER to obtain incremental income.

1) Forestry carbon sequestration: own woodland resources and rich experience in the development of forestry carbon sequestration. By the end of 2022, the company has 1.28 million mu of woodland, has developed part of forestry carbon sequestration through VCS (two phases of monitoring and carbon emission issuance have been completed, with a total of 550600 tons of carbon dioxide equivalent), and has jointly built carbon neutralization demonstration forests with some scientific and technological enterprises. Although in order to eliminate the transfer of forest land in inter-industry competition, it is still possible to further develop forestry carbon sequestration.

2) Biomass energy recycling and emission reduction: dry anaerobic fermentation technology can effectively deal with all kinds of organic wastes from agricultural and forestry production, and achieve the effect of greenhouse gas emission reduction by reducing methane emissions and replacing fossil fuels, according to the company's recruitment manual. With reference to the Methodology of Livestock and Poultry manure composting Management Emission reduction Project (CMS-082-V01) and Biomass Gas production and Marketing (CM-106-V01), it is estimated that the standard single project can reduce carbon dioxide emissions by 350000 tons per year, and the five projects can reduce carbon dioxide emissions by 1.75 million tons. (note: CCER is currently in the restart phase, and the above methodology has not yet been selected and released by the Ministry of Ecology and Environment's new CCER methodology, and the future actual emission reduction results need to be further determined after the release of the new methodology)

Fourth, how to treat the value of the company? 1) existing woodland for sale: as of the 2022 annual report, the company's net book assets were 939 million yuan, of which 537 million yuan were expendable biological assets, which were recorded at afforestation cost. According to the company's gross profit margin of living wood sales in 2022, the fair value of this part of the consumptive biological assets is about 2.034 billion yuan, that is, the fair value of the company's net assets is about 2.436 billion yuan. Considering the company's fixed additional projects to raise 300 million yuan (calculated above), the company's net assets basically meet the development capital needs of 2.815 billion yuan for the five planned biomass energy projects. 2) New business value of biomass energy: according to our calculation, according to the fixed increase plan, the project is expected to contribute 180 million net profit when it matures. Considering the huge amount of straw in China and the strong promotability of the project in the future, it will be given 25-30 times PE, corresponding to a market value of 45-5.4 billion yuan. 3) CCER carbon sequestration value: calculated according to 60 yuan / ton of carbon dioxide, the estimated income of 1.75 million tons is 105 million yuan, and the net interest rate is estimated according to 75%. It is expected to contribute 79 million yuan to profit in 25 years. Taking into account the long-term rising carbon price and some uncertainty in the estimation of the value of CCER projects, it is given 20 times PE, corresponding to a market capitalization of 1.58 billion yuan. To sum up, the reasonable market capitalization of the company is expected to be between 4.5 billion yuan and 6.98 billion yuan (carbon sequestration value can be understood as options). Coverage for the first time, giving a "overweight" rating.

Fifth, risk tips: 1) the risk of insufficient technology and talent reserve. The company's biomass energy recycling project provides technology, equipment and project operation and management services by the partner Bio Technology, and the technology and talents rely on Bio Technology to provide related support to a certain extent. If the company fails to train or hire suitable talents in the process of project operation, it may face the problem of shortage of technology and talents. 2) the risk that the economic benefit of the project is lower than expected: the demonstration of the feasibility and benefit of the project is based on the past macroeconomic environment, the results obtained by predicting the market demand of future products, product prices, raw material prices and other data. It is not ruled out that the aforementioned hypothesis deviates from the actual situation in the future due to the influence of national industrial policy, macroeconomic environment, market capacity, supply and demand, geopolitical and economic situation and other factors. 3) the progress of CCER policy is not as expected: although the Ministry of Ecology and Environment has indicated that it will strive to launch the national voluntary greenhouse gas emission reduction trading market within this year, there is still the possibility that the start of the market will be delayed and the policy progress will fall short of expectations. If the supply of CCER increases suddenly after the project is issued and restarted in the future, there will be an imbalance between supply and demand and a sharp drop in carbon prices, and the actual amount of CCER that can be developed by the company's project is also uncertain. all the above factors affect the realization of the company's carbon sequestration income.