IPO Analysis | Hunan Junxin Environmental Protection Passes Hearing: Examining the Threefold Profit Quality Behind RMB 1 Billion Net Profit

According to a disclosure by the Hong Kong Stock Exchange on September 13, Hunan Junxin Environmental Protection Co., Ltd. (referred to as: Hunan Junxin Environmental Protection, 301109.SZ) has passed the listing hearing for the Main Board of the Hong Kong Stock Exchange, with CITIC SEC and CICC acting as its joint sponsors. In our view, Hunan Junxin Environmental Protection's listing narrative is not simply that of a "solid waste leader expanding capacity," but rather revolves around operational efficiency, industrial chain synergy, and profit quality: First, the waste incineration industry has shifted from "staking out territory" to "refined operations," and the company ranked first nationwide in average on-grid electricity per tonne of waste in 2025, indicating that its project locations, furnace efficiency, and cost control possess scarce barriers; Second, after acquiring Renhe, the company filled in segments such as domestic waste transfer and kitchen waste treatment, and the scale effect and full-chain synergy of the Changsha Environmental Protection Industrial Park are expected to enhance cash flow resilience; Third, revenue and profit grew continuously from 2023 to 2025, showing that profit release depends not only on capacity expansion but also on efficiency improvement and resource utilization. However, the market will also ask how the company will absorb the risks of declining national subsidies, accounts receivable, capital expenditure, and replication in other regions. How much substance is behind the high profit growth? The prospectus shows that Hunan Junxin Environmental Protection is a company providing professional solutions for comprehensive waste treatment and resource utilization, including investment, management, and operation of green environmental energy projects. According to Frost & Sullivan, in terms of project scale, the Changsha Environmental Protection Industrial Park, where the company's main business operations are located, is one of the largest comprehensive environmental protection parks among peers in China. Hunan Junxin Environmental Protection's 2025 operating performance showed a clear characteristic of "revenue growth accompanied by even stronger profit growth." Full-year operating revenue was RMB 2.731 billion, up 13.3% year on year; gross profit was RMB 1.503 billion, up 50.2% year on year; operating profit was RMB 1.268 billion, up 45.3% year on year; profit for the year was RMB 994 million, up 44.9% year on year. Profit growth was significantly higher than revenue growth, with net margin rising from 28.5% in 2024 to 36.4%, and gross margin jumping from 41.5% to 55.0%. This combination indicates that the company's profit improvement in the period did not rely on scale expansion, but came from a shift in revenue structure and improved operational efficiency. In the first quarter of 2026, the company's revenue was RMB 736 million, up 5.6% year on year, but profit for the period reached RMB 305 million, up 29.2% year on year, with net margin further rising to 41.4% and gross margin reaching 56.6%, continuing the trend of profit elasticity release. Breaking down the profit growth, in 2025 the company's profit for the year increased 44.9% year on year, but profit before tax increased only 50.9% year on year. Actual profit before tax rose from RMB 763 million to RMB 1.151 billion, an increase of about 51%, while income tax rose from RMB 76 million to RMB 157 million, with the effective tax rate rising from 10.0% to 13.7%, dragging on net profit. By the first quarter of 2026, profit before tax increased 24.2% year on year, but income tax instead fell from RMB 44.56 million to RMB 43.52 million, with the effective tax rate dropping from 15.9% to 12.5%, which pushed profit for the period growth to 29.2%, higher than profit before tax growth. In other words, part of the high net profit growth in the first quarter of 2026 came from a lower tax rate and impairment reversals, rather than purely operational improvement. In the first quarter of 2026, impairment losses under the expected credit loss model showed a reversal of RMB 18.896 million, compared with an impairment loss of RMB 16.653 million in the same period of 2025, and this positive-versus-negative swing made a clear contribution to profit. From the perspective of revenue structure, the most notable change was the rapid retreat of construction revenue and operating revenue becoming the absolute main body. In 2024, construction service revenue was RMB 837 million, accounting for 34.7% of total revenue, while total project operating revenue in the same period was RMB 1.574 billion, accounting for 65.3%; by 2025, construction service revenue plunged to RMB 76 million, accounting for only 2.8%, while total project operating revenue rose to RMB 2.654 billion, accounting for 97.2%. This change directly explains the fluctuation in gross margin: in 2024, the share of low-margin construction revenue rose, dragging overall gross margin down to 41.5%; in 2025, as projects under construction shifted into operation, high-margin operating revenue became dominant, and gross margin quickly recovered to 55.0%. In the first quarter of 2026, construction service revenue continued to decline 49.7% year on year to RMB 24 million, while total project operating revenue accounted for 96.8%, further tilting the revenue structure toward operations. Differentiation at the project level is also clear. Phase I and Phase II of the Changsha Environmental Protection Industrial Park remain the revenue base, contributing a combined RMB 1.147 billion in 2025, or 42.0% of total revenue, but the share has fallen significantly from 64.5% in 2023, and Phase II revenue edged down year on year. Revenue from sludge, leachate, fly ash, and other segments was RMB 261 million in 2025, down 14.0% from RMB 304 million in 2024, with its share falling from 12.6% to 9.6%, and it continued to contract slightly in the first quarter of 2026. The real growth drivers were transfer, kitchen waste, Liuyang, Pingjiang, and overseas projects. Revenue from the Changsha transfer project jumped from RMB 55 million in 2024 to RMB 699 million in 2025, while the Changsha kitchen waste project rose from RMB 36 million to RMB 384 million, with their combined share rising from 3.8% to 39.7%, becoming the main engine of revenue growth. The Liuyang project contributed RMB 92 million from scratch, and the Pingjiang project increased from RMB 20 million to RMB 58 million, an increase of 185.0%, showing the incremental effect of newly commissioned projects. In addition, the overseas layout began to pay off. Phase I of the Bishkek project was commissioned in December 2025 and contributed revenue of RMB 13 million that year, accounting for 0.5% of full-year total revenue; in the first quarter of 2026, revenue from this project reached RMB 35 million, accounting for 4.7% of quarterly revenue, already exceeding the full-year 2025 level, indicating rapid project ramp-up. Although the current share is still small, its significance lies in the extension of the company's revenue map from Hunan to the Central Asian market, providing a new direction for subsequent capacity expansion and revenue diversification. At the same time, total project operating revenue accounts for nearly all revenue, meaning that future growth will depend more on the operating efficiency of existing projects, the pace of commissioning new projects, and the profit realization of overseas projects, rather than one-off recognition from construction business. Overall, the core logic of Hunan Junxin Environmental Protection's financial performance in 2025 and the first quarter of 2026 is the shift from construction-driven to operation-driven, and on that basis, simultaneous improvement in gross margin, net margin, and profit elasticity. Operating revenue accounts for more than 90%, transfer and kitchen waste projects are rapidly scaling up, Liuyang and Pingjiang projects are contributing incremental growth, the Bishkek project has begun to pay off, and revenue diversification has clearly increased. But at the same time, it should be noted that revenue growth in the first quarter of 2026 has slowed to single digits, the contraction in construction services is dragging on total revenue, the kitchen waste and sludge segments declined year on year, mature projects have limited room for growth, and although overseas projects have promising prospects, their current scale is still small and they face geopolitical and operational uncertainties. How will the "triple play" of business growth prospects be realized? Hunan Junxin Environmental Protection's business growth prospects need to be examined against the macro backdrop of the waste incineration industry as a whole shifting from incremental expansion to stock competition. As of the end of March 2026, China had 869 waste-to-energy projects in operation, with daily incineration capacity of about 11,300 tonnes per 10,000 people. Average load rates in East China and South China were about 82%, while those in Northeast and Northwest China were only 63%, and new projects fell about 38% year on year. At the same time, in 2024 the overall capacity utilization rate of urban and county waste incineration plants nationwide was only about 63.22%, below the lower limit of the national standard, and "not enough waste to burn" has evolved from an isolated phenomenon into a structural contradiction across the industry. In 2025, newly added domestic waste incineration winning bids totaled only 5,900 tonnes/day, continuing to fall 35% year on year. This landscape means that the industry's growth logic has shifted from "make money effortlessly once you win a project" to a stage of refined competition emphasizing "operations and maintenance, and quality improvement," with the operating efficiency and diversified monetization capability of existing projects becoming the core variables of differentiation. Against this backdrop, Hunan Junxin Environmental Protection's competitive advantage is first reflected in its industry-leading operational efficiency. The company ranked first nationwide in on-grid electricity per tonne of waste based on the 2025 average, and key indicators such as the auxiliary power consumption rate of incineration plants are also among the industry's top levels. In the first half of 2026, the company's domestic waste treatment volume reached 2.1734 million tonnes, up 16.79% year on year; on-grid electricity was 1.050 billion kWh, up 18.48% year on year; and on-grid electricity per tonne of waste further increased to 483.17 kWh. This efficiency advantage has clear financial implications: under the dual pressure of declining national subsidies and diverging capacity utilization rates, every unit increase in on-grid electricity per tonne directly corresponds to an improvement in marginal profit. But from the perspective of the competitive landscape, the top ten companies in the global waste incineration market together hold about 62% share, Chinese domestic companies have a market share of more than 75% in the domestic market, and leading companies such as EB ENVIRONMENT, Dynagreen Environmental Protection Group, and Beijing Capital Eco-Environment Protection Group together account for 28% of global treatment capacity. Hunan Junxin Environmental Protection still has a clear gap with these national leaders in total treatment scale, and its competitive advantage is more reflected in single-plant efficiency than in scale effects. Overseas expansion is the most differentiated part of the company's growth narrative, and also the part that requires the most cautious assessment. In the first seven months of 2026, the total treatment scale of overseas BOT projects won by Chinese waste incineration companies reached 21,378 tonnes/day, exceeding the full-year 2025 level. In the ranking of operating-type project overseas expansion, Junxin Environmental Protection ranked third, after Kangheng Environment and China Tianying Inc., with private enterprises overall showing stronger investment and operational competitiveness in this track. However, the path to profit realization for overseas projects still faces multiple uncertainties. The asset-heavy BOT model poses a severe test of financial strength. The domestic business base also faces objective pressure. The company's revenue is highly concentrated in the Changsha region. The risk brought by regional concentration is already reflected in accounts receivable data: from 2023 to 2025, the company's trade receivables were RMB 810 million, RMB 1.859 billion, and RMB 1.82 billion, respectively, and trade receivables turnover days extended significantly from 137.5 days to 242.5 days. Although the company states that its main customers are provincial capital local governments, bad debt risk is low, and waste incineration on-grid electricity fees are settled by the grid, forming a stable cash flow base, revenue from the top five customers accounts for more than 90% and is highly dependent on fiscal payments. If fiscal debt clearance weakens in the future, operating cash flow could face downside risk. Overall, Hunan Junxin Environmental Protection's growth prospects depend on the pace at which the following three key variables are realized. First, the operational efficiency advantage of existing projects is the most solid support for current performance, but growth room is limited. Second, the phased commissioning of Central Asian overseas projects is the most important source of medium-term revenue growth, and its execution quality, funding costs, and localized operating capability will directly determine whether the company can transform from a regional operator into an international solid waste treatment service provider, but it is still in the validation stage. Third, computing-power-electricity synergy and carbon asset monetization provide room for long-term valuation elasticity, but there is still a considerable distance from strategic concept to verifiable returns. In summary, the domestic waste incineration industry has entered a stock competition stage of "the strong get stronger." Hunan Junxin Environmental Protection's accumulation in operational efficiency and early overseas positioning has won it some room for differentiation, but the slowdown in accounts receivable turnover, excessively high regional revenue concentration, capital expenditure pressure from overseas projects, and the long-term impact of declining national subsidies are all constraints that cannot be ignored.