Open source securities: SAF industry flourishing Chinese companies may benefit from UCO advantage.

Open Source Securities released a research report stating that as the global climate change issue becomes increasingly severe, biofuels and sustainable aviation fuels (SAF) have become key means for the transportation sector to achieve carbon reduction goals due to their outstanding emission reduction characteristics. China's UCO resources advantage, with low cost and high carbon reduction properties, makes SAF products produced in China competitive in the international market. With stable increases in SAF demand in Europe, the UK, and elsewhere, domestic SAF plants may see stable production, thus increasing the profitability of SAF production enterprises in China, benefiting domestic companies with SAF and UCO production capabilities. Key points from the Open Source Securities report are as follows: Bio-diesel industry chain: Bio-diesel, SAF, have outstanding emission reduction characteristics in the transportation sector As the global climate change issue becomes increasingly severe, countries are enacting strict environmental regulations to reduce greenhouse gas emissions, with transportation being a key area for emission reduction. Biofuels, especially bio-diesel and SAF, are seen by various countries as key means to achieve their carbon reduction goals due to their environmental friendliness. Bio-diesel is involved in long-distance shipping, and SAF is involved in air transport, which are sectors that are difficult to electrify. UCO is a type of waste cooking oil that is a major raw material for bio-diesel and SAF production, and it has received attention due to its outstanding emission reduction properties. According to S&P Global data, UCO-produced bio-diesel has the lowest unit carbon emission value, at 19.87gCO2e/MJ. The future of the SAF industry is thriving, and China with UCO resources is expected to become a major supplier of SAF By 2024, global SAF production capacity is limited, but entering 2025, with the EU and UK officially implementing a 2% SAF blending policy, demand for SAF in the global industry will greatly increase. By 2027, CORSIA will require member countries to participate in aviation emissions reduction, and at that time, most countries globally may introduce clear SAF blending ratio policies. By 2050, the International Air Transport Association (IATA) and the Air Transport Action Group (ATAG) have committed to achieving net-zero emissions for the aviation industry, and SAF has the potential to replace a large portion of conventional aviation kerosene. In terms of supply and demand, regions like the EU, UK, and Japan with insufficient raw material supply may import SAF, while regions like China, the US, Indonesia, and Malaysia with ample raw material supply and significant SAF production capacity planning may become major suppliers of SAF. With China's UCO resources advantage of low cost and high carbon reduction properties, SAF products produced in China have strong market competitiveness in the international market. In theory, SAF profitability is strong, and domestic companies with SAF and UCO production capabilities may benefit It is expected that before 2030, the Hydrogenated Esters and Fatty Acids process (HEFA) will be the mainstream production process for SAF. Processes such as Alcohol-to-Jet (ATJ), Fischer-Tropsch (FT), and Power-to-Liquid (PtL) have stronger carbon reduction properties, but their production costs are higher than HEFA, and commercialization is still immature. Due to limited UCO production, the expansion of SAF production capacity using the HEFA process is restricted. PtL employs direct air carbon capture technology, offering the greatest emission reduction potential, and theoretically has no production material bottleneck. If the technology matures and production at scale costs decrease in the future, PtL may become the main SAF production process. According to EASA's calculations, in 2023, the estimated production cost in Europe using the HEFA process for SAF is 1,770 euros/ton, while the average price of SAF is 2,768 euros/ton, with a net profit of nearly 1,000 euros/ton. According to the "Environmental Impact Assessment Report on the 500,000 tons per year bio-based aviation fuel technology renovation and supporting project of Shandong Haike Chemical Engineering Co., Ltd.", Longzhong Information, and calculations by the firm, as of February 7, 2025, the net profit per ton of domestic SAF is approximately 714 yuan/ton, with UCO costs accounting for 78% of the total cost. Since May 2024, domestic continuous SAF production plants have had profitability. However, in 2024, domestic SAF plant orders were insufficient, and there were fewer plants in continuous production, resulting in overall lower profitability. With stable increases in SAF demand in Europe, the UK, and elsewhere, domestic SAF plants may see stable production, thereby increasing the profitability of SAF production enterprises in China, benefiting domestic companies with SAF and UCO production capabilities. Beneficiary stocks: SAF: Zhejiang Jiaao Enprotech Stock (603822.SH), Beijing Haixin Energy Technology (300072.SZ), Penyao Environmental Protection (300664.SZ), and Longyan Zhuoyue New Energy (688196.SH) among others. UCO: Shandong High Speed Renewable Energy (000803.SZ), Shenzhen Lions King Hi-Tech (301305.SZ) among others. Risk warning: Policy advancement falls short of expectations, significant increases in raw material prices, technological progress falls short of expectations, etc.