New Stocks Preview | Gross profit margin as low as -9.2%, Shougang Langze hits the trend but struggles to make a profit.

Against the backdrop of global efforts to address climate change and achieve carbon reduction, the CCUS (Carbon Capture, Utilization, and Storage) industry is flourishing and becoming a key force driving green and low-carbon development. Countries around the world have introduced strong policies, such as China actively implementing the "dual carbon" strategy to promote industrial energy efficiency and carbon reduction transformation; the EU's "Net-Zero Industry Act" and the US's "Inflation Reduction Act" are also providing guidance for the development of the CCUS industry. According to a Frost & Sullivan report, the annual global investment in the CCUS industry has increased from $1 billion in 2019 to $12.6 billion in 2023. At the same time, the growing demand in industries such as fuel ethanol, SAF, polyethylene, and feed protein materials has also provided vast market prospects for the CCUS industry. In this context, Beijing Shougang Langze Technology Co., Ltd. (referred to as "Shougang Langze"), has emerged as a key player in the CCUS industry by applying synthetic biology technology. As the only company in the world to commercialize and scale up low-carbon products using this technology, Shougang Langze has established multiple industrial facilities and garnered significant attention for its development. On December 31, Shougang Langze submitted its listing application to the Hong Kong Stock Exchange, hoping to expand its business with the help of capital markets. However, the company still faces risks such as high costs, continuous losses, and dependence on a few clients, casting a shadow over its future sustainable development. Continuous Annual Losses The prospectus shows that Shougang Langze was established in 2011 and restructured as a joint-stock company in 2021. The company's controlling shareholders are Shougang Group, NZTangMing, and Caofeidian Fund. Shougang Langze focuses on applying synthetic biology technology to the CCUS industry, aiming to commercialize and scale up low-carbon products and holding an important position in the global CCUS field. The company's main business is the sale of low-carbon products (mainly ethanol and microbial protein sales), as well as providing low-carbon comprehensive solutions for industrial customers. The company has core engineering conversion technologies in synthetic biology, such as gas component purification and biological fermentation. It has first-generation carbon reduction technology and second-generation negative carbon technology, with the latter being internationally recognized and able to efficiently utilize industrial emissions to reduce carbon dioxide emissions. According to the Frost & Sullivan report, based on 2023 revenue, Shougang Langze ranks first among companies in the global CCUS industry that use synthetic biology technology. In the first half of 2024, ethanol sales revenue accounted for 74.6% of the company's revenue. The prospectus shows that the company produces ethanol from industrial emissions, which can save food and reduce land use compared to traditional bioethanol. The report by Frost & Sullivan shows that the average cost of producing ethanol from grain was about 7,000 yuan per ton from January to December 2023, while during the same period, Shougang Langze's ethanol production cost in China was around 4,990 yuan per ton. Regarding microbial protein, in 2021, Shougang Langze obtained the first certificate for feed raw material products, with crude protein content exceeding 80%, excellent nutritional and functional characteristics, stable price with high premiums, minimal impact from seasonal price fluctuations, and has been adopted by leading domestic feed enterprises. In the first half of 2024, revenue from microbial protein sales accounted for 14.2% of the total revenue. The low-carbon comprehensive solutions mainly provide patent authorization and technical services to industrial customers to help them integrate technologies and widely apply carbon recovery technologies. In the first half of 2024, this business accounted for 10% of the company's revenue. In terms of performance, from 2021 to 2023, Shougang Langze's revenue increased from 258 million yuan to 593 million yuan. In the first half of 2024, revenue was 262 million yuan, a 14.7% decrease compared to the same period last year; the gross profit margin was -9.2%, a 21.3 percentage point decrease year-on-year. In terms of profit, the company has been consistently losing money since 2021, with losses of 49 million yuan, 24 million yuan, and 110 million yuan in 2021, 2022, and 2023 respectively. In the first half of 2024, the loss amounted to 94 million yuan, an expansion of 379% year-on-year. It was discovered that Shougang Langze's rapid revenue growth in 2022 and 2023 was mainly due to the operation of production facilities in Shoulangjiyuan and Ningxiabinze in 2022, and Jinze in Guizhou in 2023, resulting in a steady increase in production volume in the company. For example, the ethanol production increased from 22.8 thousand tons to 86.6 thousand tons from 2021 to 2023, and the microbial protein production increased from 2.6 thousand tons to 10.2 thousand tons. However, in the first half of 2024, some of the company's production facilities were shut down due to maintenance by upstream industrial emissions suppliers, resulting in reduced ethanol and microbial protein production. Ethanol production decreased to 37.7 thousand tons, and microbial protein production decreased to 4.4 thousand tons, thereby impacting sales revenue. The fluctuation in the average selling prices of ethanol and microbial protein significantly affected revenue. For example, the average selling prices of ethanol were 5,813.1 yuan, 6,055.3 yuan, and 6,004.5 yuan per ton from 2021 to 2023, showing stable prices at a relatively high level, providing some support for revenue growth. In the first half of 2024, the average selling price of ethanol dropped by 9% year-on-year to 5,436 yuan per ton, directly leading to a decrease in revenue for the company. In terms of costs, the main raw material needed for production by Shougang Langze is carbon-containing industrial emissions, whose prices fluctuate significantly due to overall market conditions, inflation, and electricity and coal prices among other factors. The material costs (mostly from purchasing carbon-containing industrial emissions) were 110 million yuan, 113 million yuan, and 178 million yuan in 2021, 2022, and 2023 respectively, accounting for 44.3%, 33.8%, and 31.1% of sales costs for the same period. The increase in material costs can squeeze profit margins, and when product prices cannot be raised simultaneously, it can lead to increased losses. Additionally, the company is in the stage of business expansion and technical research and development, with significant investment in research and development and building production facilities in the early stages. The company's research and development expenditures were around 23 million yuan, 30 million yuan, and 0 million yuan in 2021, 2022, and 2023 respectively.36 billion yuan, these investments are difficult to turn into sufficient profits in the short term, resulting in losses.Customer Concentration If Shougang Langze wants to improve its performance losses in the future, reducing reliance on a few customers is a must-answer question. According to the prospectus, the revenue from the top five customers of Shougang Langze is relatively high. As of the first half of 2021, 2022, 2023, and 2024, the revenue from the top five customers accounted for 91.2%, 82.1%, 86%, and 82.3% respectively. The revenue from the largest customer accounted for 37%, 37.5%, 46.5%, and 25% during the same period. This highly concentrated customer structure makes the company's revenue highly sensitive to the purchasing decisions of a few large customers. If the major customers reduce their purchases due to changes in their own business conditions, fluctuations in market demand, or strategic adjustments, the company's sales revenue will be directly affected. Furthermore, when raw material costs, operating costs, etc., rise, the company, due to its high customer concentration, finds it difficult to fully pass on the increased costs to customers. Large customers usually have their own cost control targets and procurement strategies and may not easily accept price increases. This makes it difficult for the company to increase its profit margin when facing cost pressures, further squeezing profitability and increasing the likelihood of losses. For example, if the price of raw materials such as carbon industrial exhaust gases rises due to tight market supply, the company may be in a disadvantageous position in price negotiations with large customers, unable to raise product prices in a timely manner, leading to a deterioration in profit. It is also noted that the operating cash flow performance of Shougang Langze is unstable. The net outflow of cash flow from operating activities in 2021 and 2023 was 2 million RMB and 10.486 million RMB, respectively, and the net cash flow from operating activities in the first half of 2024 was only 2.77 million RMB. The company's ability to generate cash flow from operating activities cannot meet the capital requirements for investment activities. Global CCUS Industry Set to Grow Rapidly Shougang Langze stated in its prospectus that the company will take multiple measures to support business growth and achieve profitability in the future, including increasing product output to increase revenue and expanding the customer base, expanding low-carbon comprehensive solution business. Overall, the decisions made by Shougang Langze are based on the rapid growth of the industry in which the company operates, with significant development opportunities in the future. According to a Frost & Sullivan report, the annual investment in the global CCUS industry has increased from $1 billion in 2019 to $12.6 billion in 2023, with a compound annual growth rate of 88.5%. The number of CCUS projects globally has significantly increased, from only 51 projects in 2019 to 392 projects in 2023, with a compound annual growth rate of 66.5%. With the promotion of the US "45Q" tax credit incentives and the development of more large industrial projects, the number of global CCUS projects is expected to increase significantly, and the annual investment in global CCUS projects is expected to continue to grow steadily over the next few years. By 2028, the total number of global CCUS projects is expected to reach 1,779, and the annual investment in the global CCUS industry is expected to reach $76.8 billion by 2028. It is estimated that the annual investment in the Chinese CCUS industry will reach 99.3 billion RMB by 2028, with a compound annual growth rate of 35.7% from 2023 to 2028. The cumulative number of CCUS projects is also expected to continue to grow, reaching 276 by 2028. In this context, Shougang Langze expects to address its business development needs by raising funds through its IPO. The company plans to use the funds raised in the IPO to enhance production capacity, technological innovation, expand product categories, and optimize operational management, achieving sustainable development and enhancing market competitiveness. In terms of capacity expansion, the company plans to use the funds to build the second phase of the Shoulang facility in Hebei. Once completed, this facility will become the world's first industrial flagship project to produce anhydrous ethanol and microbial protein using carbon monoxide produced by steel plants. The company also plans to build and develop SAF (sustainable aviation fuel) production facilities in northwestern China, with construction expected to begin in 2025 and production anticipated in 2026, with an annual capacity of approximately 50,000 tons. In terms of product research and development, the company will focus on the research and development of new downstream products, including protein hydrolyzate products and ethanol derivatives, such as polyethylene packaging materials, which can be used as bio-based materials for clothing, chemical fibers, or cosmetic packaging materials; extract bioactive peptides from proteins for animal feed, health products, and cosmetics; and explore new bacterial strains for the development of new products such as isopropanol and butanediol.