Langkun Environmental is a leading organic solid waste biotechnology enterprise in China. It has created an original “ecological park” model to achieve collaborative treatment, resource sharing, and in-depth resource utilization of various organic solid waste. Relying on organic solid waste treatment projects, in the biodiesel field, we have achieved an integrated upstream and midstream layout, stable raw material end sources, and leading costs. At the same time, the original full enzymatic production process has increased the product yield to 94%, and has achieved stable large-scale application, and its profitability far exceeds that of other biodiesel companies. Looking forward to the future, the Guangzhou project will expand regulations and improve the quality, and the new Beijing project will support the company's rapid growth. We expect the company's 2023/24/25 EPS forecasts to be 0.78/1.37/1.75 yuan, respectively. Taking into account the absolute valuation method and the relative valuation method, we believe that the company's reasonable valuation is 6.6 billion yuan, corresponding to 20 times PE in 2024, corresponding to the target stock price of 27 yuan, covering the first time, and giving it a “buy” rating.

China's leading organic solid waste biotechnology enterprise. Langkun Environmental was founded in 2001, starting with environmental engineering projects. Growth and development can be divided into four stages: start-ups, deep cultivation of organic solid waste treatment, winning bids for core projects, and leveraging resource products based on benchmark projects. In the early stages, domestic waste treatment projects were carried out using EPC (design, procurement, and construction integration) and professional subcontracting models; in the medium term, organic solid waste was deeply cultivated, research and development of anaerobic microbial treatment technology was carried out, and organic solid waste projects were gradually carried out using BOT/BOO (construction - management - transfer/construction - operation) methods. In recent years, the company won the bid for the country's largest comprehensive urban organic waste treatment project, Guangzhou Ecological Park. Since the first year of operation, the project has achieved full production and stable operation, and resource product technology has continued to improve. As core projects were built and put into operation one after another, resource-based products were gradually released, and the company's net revenue and profit increased rapidly. The compound annual growth rates of revenue and net profit in 2018-2022 reached 35.9% and 82.4% respectively. According to the company's announcement, currently the company has put into operation 5 organic solid waste projects that can process 1,000 tons in a single day. It has the highest major project experience in the country. It has signed more than 30 franchise projects, covering 10 provinces and cities, and has the highest market share in first-tier cities.

The full enzyme method reduces costs and increases efficiency, and the biodiesel business can be expected in the future. Driven by “carbon neutrality” policies and regulations, biodiesel has been widely used due to its outstanding environmental performance and excellent fuel performance. We estimate that the EU's demand for advanced biodiesel will reach 13.58 million tons in 2030, with a gap between supply and demand exceeding 5 million tons. The compound annual growth rate for 2022-2025 is over 15%. Considering that domestic enterprises exported less than 1.8 million tons in 2022, there is plenty of room for long-term exports. In the short term, the ISCC (International Sustainable Development and Carbon Certification) raw material review and EU anti-circumvention investigation are expected to end in the first half of next year, and the competitive landscape of the industry is gradually being optimized; in the medium term, domestic policies and carbon tariffs are intensively catalyzed, and China's 100 billion biodiesel market is gradually opening up; in the long run, bioaviation coal balances carbon reduction and energy density requirements, and is an important means of reducing emissions in the aviation sector. According to IATA (International Air Transport Association) estimates, the bio-aviation coal market is expected to reach 1.4 trillion yuan in 2035.

Organize the domestic biodiesel industry chain. We believe that the ability of raw material channels to guarantee supply and technical advantages are the keys to success for upstream and midstream enterprises, respectively. In terms of raw materials, Langkun Environmental relies on organic solid waste treatment projects, integrated upstream and midstream layout, and has a stable source of raw materials. Technically, according to the company announcement, Langkun Environmental's original full-enzymatic production process has increased the product yield to 94% while being environmentally friendly, and has achieved stable large-scale application. With the integrated upstream and midstream layout, Langkun's environmental profitability is leading the industry. In 2022, Langkun's environmental gross margin was 19.02%, which is 10% higher than the average value of other listed companies in the industry. With technological advantages, future profitability will be further improved.

The business model is leading, and ongoing projects support rapid growth. The company's original “ecological park” model realizes collaborative treatment of various organic solid wastes, resource sharing, and deep utilization of resources. The company has rich technical reserves and has four core technologies, including LHP ultra-high pressure separation, LCJ anaerobic microbial treatment, LBD biodiesel production, and LRT high temperature sterilization and dehydration technology, building a barrier to competition between high enterprises. Looking ahead, we expect that the Guangzhou project scale expansion alone will marginally increase net profit by 100 million yuan after delivery, and that a single project will support a net profit increase of more than 20% over the next two years. The company won the bid for an organic solid waste treatment project in Tongzhou District of Beijing in October, opening up the northern market.

The project is currently the largest organic solid waste treatment project in Beijing. The overall treatment scale is close to that of the Guangzhou project. After completion, the net revenue and profit scale will reach the level of the Guangzhou project, supporting the company's rapid growth. Furthermore, relying on its own technical resource advantages, the company actively lays out the two major synthetic biology fields of PHA (polyhydroxy fatty acid esters) and HMOs (breast milk oligosaccharides). We expect the HMOS business to generate revenue in 2024.

Risk factors: EU market demand falls short of expectations; market competition intensifies; synthetic biology research and development falls short of expectations; risk of technological backwardness; project construction falls short of expectations.

Profit forecast, valuation and rating: Langkun Environmental is a leading organic solid waste biotechnology enterprise in China. It has created an original “ecological park” model to achieve collaborative treatment of various organic solid waste, resource sharing, and deep utilization of resources. Relying on organic solid waste treatment projects, in the biodiesel field, we have achieved an integrated upstream and midstream layout, stable raw material end sources, and leading costs. According to the company announcement, the original full enzymatic production process has increased the product yield to 94%, and has achieved stable large-scale application, with profitability far exceeding that of other biodiesel companies. Looking ahead, we expect that the Guangzhou project scale expansion alone will marginally increase net profit by 100 million yuan after delivery, and that a single project will support a net profit increase of more than 20% over the next two years. The company won the bid for an organic solid waste treatment project in Tongzhou District of Beijing in October, opening up the northern market. The project is currently the largest processing project in Beijing. The overall processing scale is close to that of the Guangzhou project. After completion, the net revenue and profit scale will reach the level of the Guangzhou project, supporting the company's rapid growth. We expect the company's EPS forecast value for 2023-2025 to be 0.78/1.37/1.75 yuan, respectively.

Using the relative valuation method, considering the valuation levels of comparable companies (comparable companies Shanghai Environment, Tianying, China, Excellent New Energy, and Jiaao Environmental Protection, Wind agreed to expect an average PE of about 13.4x in 2024). Compared with enterprises in the organic solid waste treatment industry, the company's original “ecological park” model is created, and the four core technologies create high barriers to competition between enterprises. According to the company's announcement, currently the company has put into operation 5 organic solid waste projects that treat 1,000 tons in a single day. It has the highest major project experience in the country. It has signed more than 30 franchise projects, covering 10 provinces and cities, and has the highest market share in first-tier cities. Moreover, with deep resource utilization, the company's growth capacity is far higher than that of industry enterprises; compared to companies in the biodiesel industry, the company is the only enterprise that has achieved an integrated upstream and midstream layout, and the original full-enzyme production process has increased the product yield to 94%, and has achieved stable large-scale applications, and its profitability far exceeds that of other biodiesel companies. Furthermore, the company relies on the advantages of its own technical resources and actively lays out the two major fields of synthetic biology, PHA and HMOS. We expect the HMOS business to generate revenue in 2024. Combining the above three points, we believe that the company is worth a certain valuation premium, giving the company 20 times PE in 2024, with a corresponding target market value of 6.6 billion yuan. Using the absolute valuation method, the company's reasonable equity value was calculated at 6.7 billion yuan, and the valuation range was 5.850 to 7.742 billion yuan. Taking into account the absolute valuation method and the relative valuation method, we believe that the company's reasonable valuation is 6.6 billion yuan, corresponding to 20 times PE in 2024, corresponding to the target stock price of 27 yuan, covering the first time, and giving it a “buy” rating.