“Science and Technology Innovation Board Daily”, January 15 (Reporter Guo Hui) Before going public, Luther Environmental was a technology-based enterprise in the environmental management industry. In recent years, it gradually adjusted its business structure and rapidly transformed into a “feed factory” by raising capital recently.

The progress of the company's convertible bond application was updated a few days ago, and it received the first round of review inquiries. Among them, the Shanghai Stock Exchange covered aspects such as Luther Environmental's core business transformation before and after, and whether the bio-fermented feed business of white wine lees actually belongs in the field of scientific and technological innovation.

Raise capital to expand production at the bottom of the aquaculture and feed market

The Luther Environmental Convertible Bond issuance application was accepted at the end of December 2023. The company plans to raise 439 million yuan for a liquor lees recycling project in Huichuan District of Zunyi City, a resource utilization project for Gujing liquor lees, and a Gulin soy sauce recycling industry development project.

According to the plan, the fund-raising project is mainly used to expand the production capacity of the company's liquor lees bio-fermented feed business. After the project is fully completed, the related production capacity is expected to reach 520,000 tons/year. In addition to Zunyi Luther, a wholly-owned subsidiary, the implementing entities of the above project include Bozhou Luther, a subsidiary of the company with an 85% shareholding ratio, and Yongle Road, a subsidiary holding 66% of the shares.

According to information, in order to implement this production expansion project, Luther Environmental signed investment agreements with the Huichuan District People's Government in Zunyi City, Guizhou Province in April 2022, the People's Government of Qiaocheng District, Bozhou City, Anhui Province in August 2022, and the People's Government of Gulin County, Luzhou City, Sichuan Province in October 2022, respectively.

In an inquiry letter, the exchange requested Luther Environmental to explain the necessity, rationality and urgency of large-scale expansion of bio-fermented feed production of white wine lees. At the same time, the company is also required to explain the feasibility of absorbing additional production capacity and implementing fund-raising projects with regard to agreements with the government, order status, etc.

Last year, Luther Environmental won the bid for the liquor lees disposal project twice. The first is the “Yanghe, Shuanggou, and Siyang Base Liquor Disposal Project” of Jiangsu Yanghe Distillery Co., Ltd., which was sold in August 2023, with a total processing capacity of 380,000 tons/year, with a contract period of 4 years (including a 2-year construction period); the other is the lees disposal project of Winner Liquor Co., Ltd., which won the contract period for 9 years, and the total amount of lees treated during the period is expected to be 440,000 tons.

The liquor lees bio-fermented feed business is a product production and sales business. After the main business changed, in addition to continuing to obtain stable upstream lees resources, how to further open up sales channels in the downstream feed farming market is also critical to the company's performance and operation.

When receiving structural research in the third quarter of 2023, Luther Environmental said that large feed processing groups and breeding groups have strict procedures and evaluation systems for product procurement for newly built feed companies. The company's products have successively entered the procurement scope of dozens of well-known end customers such as Shounong Group, New Hope Group, Hyundai Animal Husbandry, Aohua Group, Dacheng Foods, Jiali Husbandry, and Jiuxing Agriculture and Animal Husbandry, and they are also continuing to communicate with large group customers.

According to information, investors and the market are currently watching the company's feed product sales. Take pig and broiler farming as an example. Currently, the industry is in the phase of capacity reduction; in terms of feed, the prices of corn, wheat, soybean meal, etc. are on a downward trend. According to Huiyi Network, on January 5, the spot price of corn was 2,545 yuan/ton, down 0.83% from week to month; the spot price of wheat was 2,841 yuan/ton, down 2.18% from week to week; and the spot price of soybean meal was 3883 yuan/ton, down 2.50% from week to week.

Whether the price of bio-fermented feed from white wine lees can form a comparative advantage, how much room for future price increases, and whether the sales side is under pressure are all worth paying attention.

The “Science and Technology Innovation Board Daily” telephoned the Luther Environmental Securities Department today (January 15). Its staff said that the price of the company's related products compared to peer additives has a certain advantage, about 2,000 yuan per ton. “Related markets have fluctuated greatly in the past year. For example, in June and December of last year, the market was not always sluggish.”

Does the feed also have a good flavor of sauce?

Before the IPO of the Science and Technology Innovation Board, Luther Environmental accounted for more than 75% of inorganic solid waste treatment revenue, and the company's industry was positioned in the environmental treatment industry, but in recent years, feed production and sales business has gradually taken a leading position.

During the reporting period, the company's liquor lees bio-fermented feed business accounted for 21.21%, 29.89%, 46.55% and 62.35% of the main business revenue, respectively, while the inorganic solid waste treatment business accounted for 78.79%, 70.11%, 53.45%, and 37.65% of the main business revenue, respectively. At the same time, the comprehensive gross margin of the company's main business gradually declined, to 45.11%, 37.52%, 35.17%, and 35.28%, respectively.

Among them, the most serious decline in business volume is the river and lake sludge treatment service. In the first half of 2023, the business achieved revenue of 19.1818 million yuan, a year-on-year decrease of 72.26%; during the period, river and lake sludge treatment service revenue accounted for 15.33%, down 30.61 percentage points from the same period last year.

According to Luther Environmental, the river and lake sludge treatment business was affected by complex external factors, which previously led to a slowdown in the construction, inspection, and settlement progress of some of the original projects and the overall progress of the new projects that are being followed up and have completed the test section. Currently, the company has voluntarily abandoned undertaking new environmental engineering projects with long repayment expectations.

In the inquiry letter, the Shanghai Stock Exchange paid attention to the differences and links between Luther Environmental's current fund-raising project and the company's main business and IPO fundraising project, whether the company's current business structure changed significantly compared to the time of the IPO, and required that the technical advancement, competitive pattern, and technical reserves of the bio-fermented liquor lees business be combined to explain whether the convertible bond raising project is invested in the field of scientific and technological innovation.

According to information, the early treatment method for liquor lees was to discard or directly feed animals, but it had a great impact on environmental safety and biological health. According to Luther Environmental Financial Report, its products are positioned as functional feed, using microbial solid-state fermentation and continuous multi-stage low-temperature drying technology to prepare bio-fermented feed using liquor lees as a medium, which can effectively preserve the nutritional and functional substance activity of the product, protect animal intestinal health, and achieve ecologically healthy breeding.

Luther Environmental previously stated in institutional research that even for the two different types of sake lees, strong flavor and sauce flavor, the fermented feed produced is different in terms of process and product positioning.

On the one hand, nutrients such as protein and fat contained in sauce-flavored lees are different, and the company's treatment process and fermentation varieties for strong flavor liquor lees will also vary; on the other hand, the purchase price of strong flavored liquor lees is lower than that of sauce-flavored lees. The production cost of bio-fermented feed products with strong flavor is more advantageous, and the product pricing and positioning will be somewhat different from sauce-flavored lees feed.

In the first three quarters of 2023, the company invested about 9.63 million yuan in R&D, a year-on-year decrease of 22.99%. Luther Environmental said that with the increase in bio-fermented feed construction projects for liquor lees, the company will continue to increase R&D investment around related businesses in the later stages on the basis of investment in R&D of the original technology.

Luther Environmental's latest market value is only 2.3 billion yuan. However, as a “leader in the recycling of lees,” public information shows that it received 251 institutions in 2023 and was given a “buy” rating in the past year by various brokerage firms such as Open Source, Cinda, Huaxin, Zheshang, and Guojin Securities. Affected by the external environment, downstream demand for feed was relatively weak in 2023. As a result, the full production schedule of the Jinsha plant was affected. Overall production capacity implementation and performance contributions fell short of expectations. Institutions such as CICC and Zheshang Securities had previously lowered their 2023 profit forecasts or target prices.