Interpreting New Stocks in US Stock Market | High debt levels and profit pressures are evident, how will China's largest waste household appliance recycling platform Zero Carbon Environmental Protection (CZTI.US) break through?

On October 18th, the official establishment of the new central enterprise China Resource Recycling Group Co., Ltd. was a milestone event in the history of China's resource recycling industry. This not only marks the high importance placed by management on resource recycling, but also injects new vitality into the industry's future development. Against this industry background, the largest domestic waste household appliances recycling platform, Zero Carbon Environmental Protection, has accelerated its journey to listing in the United States. It was reported that on October 30th, Zero Carbon Environmental Protection updated its prospectus for the fourth time, just under 5 months since its initial submission to the SEC on June 12th. According to the latest prospectus, Zero Carbon Environmental Protection has applied to list on Nasdaq with the code "CZTI", expecting to issue a minimum of 2.5 million ADS (representing 20 million common shares) and a maximum of 3.75 million ADS (representing 30 million common shares) in this IPO, with an issuance price range between $12.80 and $16.00 per ADS. Both the number of shares issued and the issuance price range are relatively large, which may indicate a gap between the market valuation of Zero Carbon Environmental Protection and the company's own estimates. In terms of performance, Zero Carbon Environmental Protection's performance has not been satisfactory. In the middle of 2023, although Zero Carbon Environmental Protection's revenue increased by 34.32% year-on-year to 4 billion RMB, its net profit during the period actually fell by 78.1% year-on-year to 2.825 million RMB, hovering close to the break-even point. In the first half of 2024, while the net loss narrowed by 56.3% year-on-year to 8.509 million RMB, revenue also decreased by about 17.6% to 1.799 billion RMB. It is worth noting that in the prospectus, Zero Carbon Environmental Protection explicitly stated that after the completion of the public offering of ADS, the total of 750,000 ADS held by selling shareholders could be sold, indicating that these shares are not subject to lock-up restrictions. Based on the minimum issuance of ADS, these 750,000 ADS account for approximately 3.35% of the total shares outstanding. "1+4+6" product service matrix drives leading business scale As the domestic operating entity of Zero Carbon Environmental Protection, Shenzhen Aibolue Environmental Protection Technology Co., Ltd. (referred to as "Aibolue" for short) was established in March 2016, which means that Zero Carbon Environmental Protection has been deeply involved in the recycling industry for over eight years. By 2023, Zero Carbon Environmental Protection had recycled over 11 million waste household appliances, making it the largest waste household appliances recycling platform in China. The reason for being able to achieve a leading market scale is that Zero Carbon Environmental Protection independently developed the "1+4+6" product service matrix, which accurately empowers each recycling link through a platform, four applications, and six solutions, building a digital recycling ecosystem from information integration to door-to-door recycling, centralized sorting, and environmental dismantling. The "1 platform" refers to the Bolue Wisdom Center, which can simultaneously connect the source end, recycling end, sorting end, and dismantling end, building an intelligent system with full data communication and business compatibility throughout the entire chain. The "4 applications" correspond to information collection, recycling team, recycling network, and transaction system, which are important aspects in the recycling business. In terms of information collection, Zero Carbon Environmental Protection has the Bolue Information Collection platform, which is a small program for recycling information connection and integration, available on Alipay and WeChat. As of June 30, 2024, the program had over 134,800 registered users, approximately 61,800 sales personnel and 73,000 end consumers, providing ample information on waste electronic products for recycling. It is worth noting that as of December 31, 2023, the number of registered end consumers on this small program was 35,000, meaning that in just six months, the number of end consumers had increased by nearly 40,000. In terms of the recycling team, Zero Carbon Environmental Protection has the Bolue Recycling APP for data management and information distribution on the recycling end, allowing third-party registered recyclers to bid on and accept recycling orders through Zero Carbon Environmental Protection's online renewable resource recycling system and contact suppliers. Upon completion of the order, Zero Carbon Environmental Protection deducts an information service fee ranging from 5 to 10 RMB. As of June 30, 2024, the app had over 34,000 registered recyclers. In terms of the recycling network, as of June 30, 2024, the recycling stations cooperating with Zero Carbon Environmental Protection covered over 500 cities (including county-level cities) nationwide, totaling approximately 3,700. In addition, Zero Carbon Environmental Protection had established partnerships with about 237 transfer stations and sorting centers, most of which were operated by third-party operators, with only one sorting center operated directly by Zero Carbon Environmental Protection. The Bolue Sorting Centre APP, Zero Carbon Environmental Protection's warehousing and sorting intelligent management assistant, can handle receiving, inventory checks, and sales management, while also enabling remote monitoring and recording of real-time inventory statistics. Currently, this app is being used by the recycling stations, transfer stations, and sorting centers cooperating with Zero Carbon Environmental Protection. To enrich business scenarios and provide diversified solutions to customers, Zero Carbon Environmental Protection has introduced six customer solutions, namely producer extension solutions, old-for-new service solutions, dismantling enterprise recycling system solutions, corporate recycling solutions, home platform collaboration solutions, and recycling partner solutions. These six solutions cover the entire chain of source registration, door-to-door recycling, logistics transport, warehousing and sorting, second-hand circulation, and environmental dismantling, while offering personalized services to B2B enterprises and third-party platforms. According to the prospectus, Zero Carbon Environmental Protection's recycling mainly involves two methods. One is that recyclers communicate with individual suppliers or traditional recycling stations via phone, collect items on-site, and transport the collected renewable resources to recycling stations, transfer stations, or sorting centers. The other method is that individual suppliers or corporate suppliers directly transport their renewable resources to recycling stations, transfer stations, or sorting centers. In this case, Zero Carbon Environmental Protection will purchase waste household appliances and scrap metal from these recycling stations, transfer stations, and sorting centers, and sell the waste household appliances to downstream second-hand markets, dismantling and disposal enterprises, while supplying scrap metal to downstream waste metal processing companies and steel mills. Therefore, offline collectionThe sales of black metal and scrap household appliances are the main source of zero-carbon environmental income, and in 2023, their offline revenue accounted for as high as 99.8%. Among them, the revenue from the sale of scrap household appliances accounted for 37.1%, and the revenue from the sale of scrap metal accounted for 62.6%.The weak downstream demand led to a decline in revenue, while low profitability led to high debt levels for Zero Carbon Environmental Protection. From a performance perspective, the performance of Zero Carbon Environmental Protection is not ideal. In the middle of 2023, the revenue of Zero Carbon Environmental Protection increased by 34.6% to 4.01 billion, mainly due to the drive of two major businesses: waste household appliances and black metal recycling. During the reporting period, the amount of black metal recycled by Zero Carbon Environmental Protection increased from about 70 tons to about 90 tons, leading to a revenue growth of 23.2% to 2.51 billion in the black metal recycling business. At the same time, the expansion of the recycling network increased the amount of waste household appliances recycled from about 7 million units to 11 million units, driving the revenue of waste household appliances recycling business to increase by 64.7% to 1.487 billion. However, the net profit in 2023 declined by 78.1% to 2.825 million, mainly due to rising product costs and an increase in total marketing expenses driven by IPO expenses, which increased by 35.2%, faster than the revenue growth. In addition, interest expenses and other expenses increased, eroding the net profit. In the first half of 2024, the total revenue of Zero Carbon Environmental Protection decreased by about 17.6% to 1.799 billion compared to the previous year, mainly due to a decrease in downstream demand for non-ferrous metals and waste household appliances. The amount of non-ferrous metal recycled decreased from about 510,000 tons in the same period of 2023 to 490,000 tons, while the average price per ton decreased by about 3%, resulting in a 7.4% decrease in revenue for non-ferrous metals to 1.332 billion. On the other hand, the amount of waste household appliances recycled decreased from about 5.5 million units in the same period of 2023 to 3.5 million units, with an average price decrease of about 4%, leading to a significant decrease of 37.7% in revenue for waste household appliances to 460 million RMB. Despite the significant revenue decrease in the first half of 2024, the net loss was narrowed by 56.3%. This was mainly because Zero Carbon Environmental Protection reduced subsidies to contractors, leading to a 58.4% reduction in performance expenses, releasing profits and reducing net losses to a similar extent. The performance of Zero Carbon Environmental Protection in the first half of 2024 may have surprised some investors, especially since the government has been aggressively promoting equipment renewal policies, prompting a wave of appliance upgrades. According to the National Bureau of Statistics, in the first half of the year, national air conditioner production increased by 13.8%, national refrigerator production increased by 9.7%, national washing machine production increased by 6.8%, and national color TV production increased by 0.4%. This indicates that the equipment renewal policy has been effective. However, why did Zero Carbon Environmental Protection not benefit from this trend? The key reason is that Zero Carbon Environmental Protection's revenue comes from the sale of recycled products. However, due to the concentration of waste household appliances and metals resulting from the equipment renewal policy, the supply of waste household appliances and metals has significantly increased, leading to a decrease in prices. Coupled with insufficient downstream market demand, Zero Carbon Environmental Protection's waste metals and waste household appliances have fallen into a situation where both quantity and prices have plummeted. Therefore, it can be foreseen that Zero Carbon Environmental Protection may face great challenges in improving its performance in the short term, as well as in the long term. These challenges include high customer concentration. According to the prospectus, in 2022 and 2023, the revenue from the top five customers of Zero Carbon Environmental Protection accounted for 58.5% and 54.8% respectively. By the first half of 2024, this ratio further increased to 59.3%, with the top two customers accounting for nearly 40%. If demand from these top customers weakens, it will impact the business operations of Zero Carbon Environmental Protection. Secondly, the market is highly fragmented and competitive. According to a CIC report, China's renewable resource recycling industry is highly fragmented, with more than 90,000 companies operating in this sector in 2022. The market is filled with various market participants, including individual recyclers, online recycling platforms, home appliance manufacturers implementing EPR, e-commerce platforms, and self-built recycling platforms by dismantling factories. Zero Carbon Environmental Protection recycled over 11 million waste household appliances in 2023, becoming the largest waste household appliance recycling platform in China with a market share of only 1.04%. This market fragmentation and intense competition may exert greater pressure on the operation of Zero Carbon Environmental Protection in the future. Thirdly, low profitability and high debt levels. Although the business system of Zero Carbon Environmental Protection tends to be an asset-light operation with an Internet model, from the perspective of profitability, it currently plays a role more akin to a reseller with low business value content, and the company is still hovering around the breakeven point. Although Zero Carbon Environmental Protection has started to develop higher-profit service revenue, it has not yet shown any effective results, with revenue contribution being negligible. Due to intense market competition, low business value content, weak profitability, Zero Carbon Environmental Protection's business scale expansion requires the simultaneous expansion of the liability side. As of June 30, 2024, the total assets of Zero Carbon Environmental Protection were 522 million, total liabilities were 519 million, with an asset-liability ratio close to 100%. Of the total assets of 522 million, accounts receivable amounted to 242 million, indicating a high level of accounts receivable, which may pose impairment risks due to low business value content and relatively weak competitiveness. In conclusion, facing the weakening downstream demand, Zero Carbon Environmental Protection may face challenges in achieving outstanding performance in the short term. Looking at it from a long-term perspective, the company faces multiple potential operational challenges, including intense market competition, low business value content, weak profitability, high debt levels, and high customer concentration, which may all exert some pressure on the IPO valuation of Zero Carbon Environmental Protection.