Qihe Environmental Protection Group (referred to as "Qihe Environmental Protection") is one of the largest listed metal waste recycling companies in the world.
The company has operations in Asia, Europe and North America. We have recently communicated with Qihe Environmental Management about the company's business recovery. We believe that the company's stock metal recycling business is getting back on track and is fostering new growth points in China through a joint venture with China Hongqiao (1378 HK, Buy). At present, the company's trading market capitalization is only 0.33 times net price, for the upcoming fundamental improvement, we believe that the company deserves the opportunity of revaluation. We suggest that investors can include Qihe Environmental Protection in the follow-up observation.
Global leader in metal recycling. Qihe Environmental Protection acquired German Schultz Group (Schultz) in 2016, and the company has accumulated more than 150 years of expertise in environmental recycling. Since then, the company has become one of the largest listed metal waste recycling companies in the world, with a wide range of business in ferrous metals, non-ferrous metals, scrap cars, electronic scrap, aluminum scrap and recycled aluminum ingots. By 2020, the company has more than 200 processing plants and warehouses in Asia, Europe and the Americas.
Business is back on track. Qihe Environmental Protection experienced profit fluctuations in 2019-20, mainly due to 1) the Chinese government adjusted its solid waste import policy, and 2) the economic and regional blockade impact of the COVID-19 epidemic. The board of directors changed the management team in 2020, and the new team was determined to restructure the business, including 1) transferring the Chinese business unit, which relies mainly on imported waste, to Southeast Asian countries such as Malaysia, India, Thailand, and 2) divesting the business in the southwestern part of the United States to further improve the overall business efficiency. After the above adjustment, the company's first-quarter after-tax profit has reversed from a 1Q20 loss of HK $33.5 million to a 1Q21 profit of HK $57 million. We believe that the company's scrap metal recycling business is gradually back on track.
China business is looking for new growth points. We believe that China's carbon neutral development strategy will bring good opportunities for promoting China's metal recycling industry and cultivating new growth points for the company. Schultz, a wholly owned subsidiary of the company, set up a joint venture with China Hongqiao in Shandong Province to develop an annual recycling project for 100000 scrapped cars and 500000 tons of recycled aluminum. The company has started project construction since February 2021, and plans to produce the first can of aluminum water by the end of 2021, and to achieve slope climbing of the first phase of the project in 2022 (50, 000 scrapped vehicles and 200000 tons of recycled aluminum).
It's time to reassess the opportunity. We believe that the company is currently developing a dual catalyst to drive the revaluation. On the one hand, the profitability of the company's stock business is gradually recovering, and the profit side is expected to rebound strongly in the context of the current better commodity prices; on the other hand, we believe that the progress of the company's Shandong joint venture project with China Hongqiao will strengthen the market's expectations for the company's profit growth. The company's shares have rebounded strongly since the start of the year, but are now valued at 0.33 times price-to-book. We believe that Qihe Environmental Protection has sufficient room for value revaluation.
Main risks: debt repayment pressure of controlling shareholders; lack of liquidity in market transactions.