Five Challenges of Environmental Protection Industry in the Red Sea Era

More than half of 2023 has passed, and this historical turning point year bearing all kinds of change expectations has been basically clear, which can be summarized as "recovery is in sight and growth is slow" on the whole.

As far as the performance of listed companies in the first half of the year is concerned, the environmental protection sector has increased steadily, and the indicators such as interest rate, expense rate, cost and cash flow have all improved, but they have shown great differentiation in some areas, and the situation in different segments is different, and the situation is different among different enterprises in the same field.

The era of rapid growth in the performance of environmental protection enterprises has ceased to exist, and it has been replaced by great differentiation. As far as the first half of this year is concerned, 30% of listed environmental protection enterprises still have a double decline in their performance and profits.

The industry as a whole is gradually recovering, but at the same time, it has entered an era of almost stagnant growth, and a real Red Sea era has arrived. Judging from the multi-polarization of the industry and the operating conditions of some enterprises, this will be an era of new challenges.

In the research conducted by Castle Peak Research Institute this year, a prominent problem has emerged, that is, there are fewer orders from enterprises, but more problems. It can be seen that the new changes in the internal and external factors of the industry pose a higher challenge to the strategic ability, market ability and management level of enterprises.

The policy orientation fades, while the economic orientation becomes stronger: from a phased perspective, environmental protection is a policy-driven industry, and from a long-term perspective, environmental protection is an economic-driven industry. The heat of the market is fluctuating and will not always rise in a straight line. The environmental protection industry is increasingly affected by the fluctuation of the economic situation. Some sub-sectors of environmental protection are not as hot as before, such as coal chemical wastewater treatment, hazardous waste treatment, etc. One of the major reasons is that under the economic downturn, investment activities in related fields have declined and demand has decreased. Environmental protection serves economic growth, and at the same time, based on economic growth, the two depend on each other. Municipal demand depends on government investment, and enterprise demand depends on the investment of polluting production enterprises. These two types of demand are the main components of the environmental protection market and are both affected by the economic situation. Objectively speaking, an enterprise will not keep growing at a high speed. It is more in line with the logic of long-term development to adjust its growth rate at an appropriate time, especially when a growth logic ends, and adjust its strategy in time to build a second growth curve. If the environmental protection industry goes further, it will be affected by the economic cycle to a greater extent. The market heat depends on the economic prosperity, and the hot market comes from the hot field.

The engineering drive is weaker and the operation drive is stronger: the cyclical change of the environmental protection industry itself is one of the important reasons for the decline of many enterprises' performance. Judging from the performance of several environmental protection enterprises with the largest scale, the income and profits have declined to varying degrees, one of which is the decline of engineering business. The turning over of the engineering era is not only reflected in the collapse of small and medium-sized environmental protection engineering companies, but also in the decline of the performance of the head enterprises and even the debt storm.At present, many enterprises have laid out this track to improve operational efficiency. Fourth, management efficiency upgrade, which is an urgent and feasible direction, but the understanding of many enterprises is not deep enough, and most of the substantive actions are a mere formality, but it is inevitable in the end. The sharp decline of engineering projects has great impact and lethality for many enterprises, and enterprises need to adjust the whole business model.

The incremental space has narrowed, and the stock killing has become fierce: in the past two years, the word "stock" has been a high-frequency vocabulary in the financial reports and various industry reports of environmental listed companies, and it has been frequently mentioned because the lethality brought by stock is too great. Take a head enterprise in the field of hazardous waste as an example, after the market entered the stock, its performance and profit declined obviously. The common reason behind this is that there are not enough people, and there are many participants in the hazardous waste treatment market itself. Once it enters the stock state, the killing will be fierce, and the performance and profits of enterprises may decline. The same is true for the whole field of waste incineration treatment, and the inventory involution has become the new normal of the industry. It can be said that facing up to the stock and adjusting the strategy accordingly is the primary challenge for environmental protection enterprises at this stage, because for many enterprises, the stock not only means difficult performance, but also may bring a devastating blow.

The longer the account period, the more difficult it is to pay back: There are many disadvantages in the environmental protection industry, such as low threshold and disorder, but in fact, there are other aspects that make enterprises feel more uncomfortable, such as poor payment conditions and difficult to pay back. For some enterprises, the worst thing is not that there is no project to do, but that the project has not come back after it has been completed. If the company that is the head contractor can't pay back the money, the pressure will be transmitted layer by layer, and it will be difficult for enterprises that provide supporting services such as equipment to pay back the money. The general operation cycle of environmental protection projects is about 1-3 years, and some projects are as long as 3-5 years, which is a long project cycle. If we add the long process of asking for money, the final profit will be suspended. Recently, at the economic work conference in the second half of the year, the state clearly proposed to solve the problem of government arrears in corporate accounts. It can be seen that the current problem of government arrears in corporate accounts is a common problem, and the pressure on environmental protection enterprises to pay back funds will increase in a period of time. In view of this dilemma, many companies take dunning as the next important measure. For example, "The company will continue to strengthen the management of accounts receivable, formulate a perfect accounts receivable collection and management system, realize the timely recovery of accounts receivable, continuously improve the company's operating cash flow, and avoid the loss of bad debts", which is very necessary.

Higher operating costs and smaller profit margins: According to the data of environmental protection listed companies, the cost pressure is increasing and the gross profit margin is declining. On the one hand, the operating costs of enterprises are rising. For example, the procurement cycle of raw materials is too long, which may lead to the purchase price of raw materials exceeding expectations due to the drastic fluctuation of market prices, thus causing the company's profitability to decline. On the other hand, under the trend of fierce competition in the environmental protection industry, the profit space has been continuously compressed, and it is common for some projects to bid at the cost price. Under this situation, the inefficiency of environmental protection enterprises in strategy, management, operation and market is increasingly difficult to cope with the new competitive pattern, and the efficiency war of environmental protection industry is starting. Environmental protection is the cost of social life and production, and one of the development purposes of environmental protection industry is to continuously improve economy and reduce the environmental governance cost of the whole society. Therefore, the weak cost consciousness and rough management are not conducive to the development of enterprises, but also violate the development essence of environmental protection industry in a certain sense. With the deepening of the operation era, the efficiency war in the environmental protection industry will intensify, and enterprises should enter the refined management mode as soon as possible.