Debt Resolution Funds Accelerate Deployment, Enhancing Cash Flow Prospects for Waste-to-Energy Sector!
Following the implementation of China's RMB 12 trillion local hidden debt replacement plan in November 2024, the pace of local government debt restructuring has significantly accelerated.
As a result, multiple publicly listed solid waste management companies, primarily engaged in waste-to-energy (WTE) operations, have reported substantial receivables recovery, amounting to billions of RMB. Some companies have even set new monthly collection records.
Since the rapid expansion of WTE projects in 2021, the growing financial burden on local governments has led to an increase in accounts receivable for solid waste management enterprises. According to industry statistics from Wind, as of Q3 2024, the total accounts receivable of 34 listed solid waste management firms exceeded RMB 56.2 billion, marking an increase of nearly 80% compared to the full-year figure in 2021. Additionally, the average accounts receivable turnover days rose from around 130 days at the end of 2021 to nearly 195 days, exacerbating cash flow concerns.
During a recent investor conference call, when asked about the impact of debt resolution policies on garbage disposal fee settlements, Green Power (601330.SH) responded:
"The increase in local government debt quotas for replacing outstanding hidden debts will ease repayment pressure and benefit the settlement of waste disposal fees."
The long-standing issue of high accounts receivable has been a major challenge for many WTE-focused solid waste management enterprises. Revenue streams for these companies mainly stem from waste disposal fees, electricity sales from incineration, and government subsidies. Industry experts told Yicai Global that the majority of WTE companies' receivables come from government subsidies for renewable energy power generation and overdue payments from local governments for waste disposal fees. While the national electricity subsidy settlement cycle typically takes 1-2 years and garbage disposal fees are generally settled within three months, recent years have seen extended payment cycles in certain regions, resulting in a high proportion of government-related receivables.
With the launch of China's largest-ever debt resolution initiative in November 2024, the policy's integration with overdue payments to SMEs has raised market concerns about whether debt resolution funds will be used to settle outstanding receivables.
Since the beginning of the year, several solid waste management companies have publicly disclosed their receipt of government debt resolution funds and the repayment of overdue accounts. On Chinese New Year's Eve, Chengfa Environment (000885.SZ) announced via its official WeChat account that its solid waste division collected over RMB 1 billion in January, setting a new record for monthly receivables collection. The division also achieved a single-day collection record of RMB 27.73 million.
Earlier, Qiaoyin Co. (002973.SZ) reported that with the accelerated rollout of debt resolution funds, it had received over RMB 770 million in payments. The company expects a significant reduction in outstanding receivables by 2025, leading to improved operating cash flow. Meanwhile, Yingfeng Environment (000967.SZ) announced on January 26 that it had collected over RMB 3 billion in the past two months, marking a strong start to the year.
Yingfeng Environment stated that the implementation of China's RMB 12 trillion debt resolution policy will improve local government finances, enhancing their ability and willingness to make payments. This will provide a much-needed opportunity for listed companies burdened by high receivables and lay a solid foundation for 2025 growth.
Hanneng Environment (600323.SH), Shengyuan Environmental Protection (300867.SZ), and Sanfeng Environment (601827.SH) have also noted in investor interactions that the RMB 12 trillion debt resolution initiative will facilitate the recovery of accounts receivable and improve cash flow conditions.
Notably, leading industry players have benefited significantly from this policy. Companies like Yingfeng Environment and Hanneng Environment, which have collected RMB 3 billion and RMB 2.4 billion, respectively, have seen their accounts receivable shrink by 46% and 49% of their Q3 2024 balances, easing financial strain.
However, fewer than 10% of the 34 solid waste management firms have disclosed updates on receivables recovery. A WTE company employee in South China told reporters:
"Policy implementation takes time, and our company has not yet received formal notification. We will continue engaging with relevant customers to improve receivables collection efficiency."
Green Power also stated in its investor call that government subsidy settlements in 2024 have been better than in 2023, but receivables collection has yet to reach a normalized pace.
Long-Term Challenges: High Receivables and Market Saturation
According to Changjiang Securities analyst Xu Ke, the WTE industry’s receivables issue has worsened since 2021. The rapid expansion of WTE projects due to competitive bidding policies led to a sharp increase in accounts receivable, which was further exacerbated by rising local government financial pressures from 2022 onward.
Wind data shows that by Q3 2024, the 34 listed solid waste firms collectively held over RMB 56.2 billion in accounts receivable, with an average of RMB 1.65 billion per company, nearly 80% higher than in 2021. These receivables accounted for over 50% of average annual revenue, while the turnover period extended from 130 days to 195 days.
At the same time, China's WTE market has limited future expansion opportunities. Zheshang Securities reports that in the first half of 2024, only 10 WTE projects were awarded nationwide, with a total capacity of 3,630 tons per day, representing a 63% decline in project count and a 77% drop in capacity compared to H1 2023.
Industry Response: Mergers, Efficiency Gains, and Overseas Expansion
As high accounts receivable persist, cash flow remains uncertain, and domestic WTE capacity approaches saturation, industry experts see mergers, efficiency improvements, and international expansion as potential solutions.
On February 19, Hanneng Environment announced significant progress in its major asset restructuring plan. In July 2023, the company revealed its intention to privatize Hong Kong-listed Canvest Environmental Protection (01381.HK) for HKD 11.1 billion. Hanneng stated that industry consolidation would enhance its asset scale and profitability, although it may temporarily increase its debt ratio. However, in the long run, improved operational performance will strengthen its debt repayment capacity.
Meanwhile, many WTE companies are eyeing overseas markets for new growth opportunities. Southeast Asia, in particular, has emerged as a key target due to geographic proximity, cultural similarities, high subsidies, and strong policy support.
For instance, China Everbright Environment (00257.HK) has developed three WTE projects in Vietnam, including the Can Tho and Hue projects, with total investments of USD 47 million and USD 74.55 million, respectively. China Tianying (000035.SZ) has also established multiple waste treatment projects in Vietnam, Singapore, and India, with its Hanoi project reaching 4,000 tons per day.
These international ventures offer strong profitability. Zheshang Securities analyst Xie Chaobo noted that overseas WTE projects typically generate revenue exceeding RMB 420 per ton, significantly higher than the domestic average of under RMB 300 per ton.
With rising urbanization and economic growth, Southeast Asian nations such as the Philippines, Vietnam, Indonesia, Thailand, and Malaysia offer a vast investment potential of RMB 76.8 billion, based on a projected 50% incineration rate and investment of RMB 500,000 per ton per day.
As a result, many WTE companies are accelerating their overseas expansion efforts. Sanfeng Environment stated that Southeast Asia and South Asia will be its primary overseas markets, and the company has established a dedicated international business division to drive global expansion.
Green Power also announced that in November 2024, its board approved a bid for a Malaysian WTE EPC project, forming a consortium with a state-owned enterprise experienced in overseas operations.
Source: https://mp.weixin.qq.com/s/Bm6efraTxvC80ZRG1Aqwqg