Company and Industry Summary Company: Langkun Technology (朗坤科技) Key Points - **UCO Price Dynamics**: The price center of Used Cooking Oil (UCO) is expected to systematically rise due to demand growth and supply constraints, indicating a high level of certainty in this trend. Compared to Shanhigh, Langkun Technology has not received significant market attention previously, suggesting a potential investment opportunity [1][1][1] - **Policy Support**: The demand for UCO is being driven by rigid policy requirements, which are expected to enhance UCO demand and lead to a revaluation of its value. The long-term scarcity of supply is becoming increasingly evident. UCO is a high-quality raw material for producing Hydrotreated Vegetable Oil (HVO) and Sustainable Aviation Fuel (SAF) via the HEFA route, with carbon reduction potential exceeding 80%, outperforming palm oil and other vegetable oils. It has received priority support from EU policies such as REDIII and ReFuelEU [1][1][1] - **Market Positioning**: Langkun Technology's focus on first-tier cities is a strategic advantage. The company has a current capacity of 3,911 tons/day from existing kitchen waste projects and holds five large-scale projects in the Guangdong-Hong Kong-Macao Greater Bay Area, Beijing-Tianjin-Hebei, and the Yangtze River Delta, ensuring stable demand and payment capabilities [1][1][1] - **Capacity Expansion**: Projects in Tongzhou and Fangshan are expected to double the kitchen waste processing capacity to 6,761 tons/day by 2026-2027. The UCO output is projected to increase from 50,000 tons to 300,000 tons (10,000 tons from self-production and 200,000 tons from channel integration), indicating strong certainty in organic growth [2][2][2] - **Financial Metrics**: As of January 23, Langkun Technology has a Price-to-Earnings (PE) ratio of 24 times, while Shanhigh has a PE ratio of 59 times. The current UCO market conditions are favorable, and with the confirmation of the company's BOT (Build-Operate-Transfer) projects, the net profit is expected to exceed 400 million yuan by 2026, corresponding to a PE of less than 15 times [2][2][2] - **Long-term Projections**: If the self-produced UCO volume reaches 100,000 tons, and assuming UCO prices rise to 9,000 yuan/ton without considering contributions from HMOs, the projected net profit could exceed 600 million yuan, resulting in a PE of only 10 times [2][2][2]

Summary of Key Points from the Conference Call Industry Overview - The conference call discusses the current status and outlook of the Sustainable Aviation Fuel (SAF) and biodiesel markets, particularly focusing on the global and European markets [1][6]. Core Insights and Arguments - **Global SAF Market Growth**: The global SAF market is expected to grow by 300,000 to 400,000 tons in 2026, with significant contributions from the CORSIA mechanism in 2027, which mandates equal carbon emissions at both ends of flight routes [1][6]. - **European Market Demand**: The European market is experiencing high demand for Hydrotreated Vegetable Oil (HVO) due to the EU's RED3 legislation and double carbon credit policies in countries like Germany [1][4]. The total demand in Europe and non-EU regions is projected to be around 1.8 million tons in 2026 [2]. - **Domestic Supply Constraints**: In China, the supply of waste cooking oil is tight, estimated at 4-4.5 million tons, which is insufficient to support planned production capacities [1][10]. The potential for new capacity must be assessed cautiously to avoid oversupply due to raw material shortages [1][10]. - **Raw Material Viability**: Palm oil and agricultural waste are technically feasible as raw materials, but certification issues and high costs limit their large-scale application [1][11]. The demand for palm-based products in Europe is noteworthy [1][11]. - **Impact of Restructuring**: The restructuring of China National Aviation Fuel (CNAF) and Sinopec is not expected to have a significant short-term impact on the domestic aviation fuel market, but long-term implications could arise if Sinopec leads SAF applications [1][12]. Additional Important Insights - **Price Dynamics**: The price of HVO in Europe is currently around $2,500, while soybean prices have dropped below $2,100 [4]. The market is expected to stabilize in 2026, with less volatility in procurement structures [9]. - **Regulatory Factors**: The implementation of the EU ID3 legislation and potential changes in carbon credit policies could significantly impact supply gaps and cost burdens for airlines [3][13]. - **UCO and Plant Oil Price Correlation**: There is a moderate correlation between UCO (Used Cooking Oil) and plant oil prices, with a correlation coefficient of approximately 0.6 [21]. - **UCO Production and Export**: China produces over 4 million tons of UCO annually, with about 2 million tons exported [22]. Future growth in UCO production may slow as potential resources are fully developed [22]. Conclusion The conference call highlights the complexities and dynamics of the SAF and biodiesel markets, emphasizing the importance of regulatory frameworks, supply constraints, and price stability in shaping future market conditions. The potential for growth in these sectors remains significant, but careful monitoring of raw material availability and regulatory changes is essential for stakeholders.

Core Insights - The biodiesel industry is positioned at the intersection of "global green demand expansion" and "China's unique resource endowment," with short-term performance supported by export demand and long-term market potential driven by domestic policies [1] - Biodiesel, as an environmentally friendly energy source, is expected to benefit from both policy and demand incentives amid the global carbon neutrality trend [1] - The industry is transitioning from first-generation FAME to second-generation HVO biodiesel, which offers superior performance and carbon reduction benefits, making it a key choice for high-end sectors like transportation and aviation [2] Industry Growth and Demand - The global biodiesel market is experiencing continuous growth, driven primarily by mandatory blending policies in developed markets like the EU and the US [3] - The EU aims to increase the share of renewable energy in the transport sector to 29% by 2030, while the US RFS plan is set to promote ongoing growth in biofuel consumption [3] - From 2009 to 2023, global biodiesel consumption grew at a CAGR of approximately 10.34%, with projections of 5.71% CAGR from 2024 to 2027; HVO consumption is expected to grow even faster at an average annual rate of 16.38% from 2024 to 2028 [3] Supply Dynamics - Global biodiesel production is steadily increasing, with a CAGR of about 8.08% from 2012 to 2025, primarily in the EU and the US [4] - Southeast Asia, South America, and China are expected to gradually reshape the biodiesel supply landscape due to their raw material advantages [4] - Southeast Asian countries benefit from palm oil production, while South America leverages low-cost raw materials and compatibility with RFS; China utilizes waste cooking oil to achieve carbon reduction [4] Trade Patterns - The global biodiesel trade is shifting from "cost basins" to "policy highlands," reflecting a complex network influenced by resource endowments and policy compliance [5] - Current trade routes include Southeast Asia exporting low-cost raw materials to Europe, South America supplying the US with soybean oil products, and China primarily exporting to the EU [5] China's Market Landscape - China's biodiesel market is currently export-driven, with domestic demand poised for growth due to policy catalysts [6] - In 2024, China's biodiesel production capacity is expected to exceed 5 million tons per year, with an estimated output of 3.035 million tons, while consumption is only 867,000 tons [6] - The export volume to the EU is projected to decline by 75.41% in 2024 due to anti-dumping policies, prompting a shift towards SAF transformation and domestic market expansion [7] Industry Barriers - The core barriers in the biodiesel industry are centered around raw material control, technological breakthroughs, and economies of scale [8] - Companies with stable waste cooking oil recovery networks can establish cost advantages, while HVO/SAF production involves complex processes that require advanced technology [8] - Large-scale facilities can spread fixed costs, with leading global companies having HVO capacities exceeding 500,000 tons per year, and domestic firms accelerating expansion [8]

Investment Rating - The report maintains an investment rating of "Outperform the Market - A" for the environmental and public utility sector [7] Core Insights - The report highlights significant price increases for second and third-generation biodiesel (HVO and SAF) in 2025, with HVO reaching a peak of $2853.38 per ton and SAF at $2900.95 per ton, reflecting increases of 69.2% and 69.1% from their lowest points respectively [1][17] - The demand for SAF is driven by the EU's ReFuelEU Aviation Regulation, which mandates a gradual increase in SAF content in aviation fuel, leading to an estimated demand increase of approximately 1.4 million tons in 2025 [1][19] - The report emphasizes the scarcity of used cooking oil (UCO) as a raw material for HVO and SAF, suggesting that companies with waste oil resources and production capacity should be closely monitored [3][39] Summary by Sections 1. Special Research - The report discusses the upward trend in biodiesel prices due to downstream demand, particularly for SAF and HVO, with significant price increases observed in 2025 [1][17] - It notes that multiple countries are implementing policies to increase biodiesel blending ratios, with global biodiesel consumption expected to exceed 75.77 million tons by 2030 [2][25] - UCO is identified as a critical raw material with limited supply, highlighting the need to focus on companies that can efficiently utilize waste oil resources [3][39] 2. Market Review - The report provides a market performance overview, indicating that the Shanghai Composite Index rose by 4.06% from December 26 to January 9, with various sector performances detailed [4][42] 3. Industry Dynamics - The report outlines recent legislative progress in the EU regarding renewable energy, particularly the RED III directive, which aims to increase the share of renewable energy in the EU's energy consumption to 42.5% by 2030 [19][20] - It highlights the growing demand for advanced biofuels and the expected increase in biodiesel consumption in developing countries, which may take over as the main growth area for biofuels [2][23] 4. Investment Portfolio and Recommendations - The report suggests focusing on companies with strong capabilities in waste oil production and technology, such as Shanhigh Environmental, Longkun Technology, and Zhuoyue New Energy, due to the anticipated growth in SAF and HVO demand [3][39]

Investment Rating - The industry investment rating is maintained at "Outperform the Market - A" [4] Core Views - The sulfur price is experiencing fluctuations due to supply-demand dynamics, with a short-term supply guarantee not fundamentally altering the long-term tight resource situation. The expected global sulfur supply-demand gap for 2026 is projected to be -5.13 million tons, indicating a strategic revaluation of sulfur resources in the long term [2][16] - The recent restructuring between Sinopec and China Aviation Oil is expected to enhance the integration of oil refining and distribution, potentially accelerating the commercial use of Sustainable Aviation Fuel (SAF) in China [3][7] Summary by Sections 1. Core Insights of the Week - The market is witnessing a rebound in oil prices, with Brent crude reaching $63.05 per barrel, reflecting a 3.7% increase. This is driven by geopolitical tensions affecting supply expectations [14] - The chemical sector is gaining attention due to a better-than-expected Producer Price Index (PPI) recovery, indicating potential for upward valuation in the sector [15] 2. Chemical Sector Performance - The basic chemical industry index increased by 3.7% in the week, outperforming major indices like the Shanghai Composite and ChiNext [21] - Among 26 sub-sectors, 25 experienced gains, with the top performers being modified plastics (+9.5%) and inorganic salts (+7.2%) [26] 3. Stock Performance in the Chemical Sector - In the basic chemical sector, 373 out of 424 stocks rose, with notable gainers including Prit (42.6%) and Sanfu (32.3%). Conversely, stocks like Evergrande High-Tech saw declines of 13.1% [28][29] 4. Investment Focus Areas - The report suggests focusing on four main investment lines: 1. Upstream resource assets with strong profit certainty, particularly in phosphorus and sulfur [16] 2. Supply-side optimization under "anti-involution" policies, targeting sectors with high concentration and price elasticity [17] 3. Low-valued leading stocks in the sector, as capital expenditure cycles slow down [18] 4. New productivity investments aligned with green energy and advanced materials [20]

Investment Rating - The industry investment rating is "Overweight," indicating that the industry is expected to outperform the overall market [10]. Core Insights - The recent approval of Germany's RED III legislation is anticipated to boost the demand for HVO (Hydrotreated Vegetable Oil) and UCO (Used Cooking Oil) [4]. - The legislation raises greenhouse gas (GHG) reduction targets for gasoline and diesel to 19% by 2030, significantly higher than the EU's unified target of 14.5% [4]. - The cancellation of double counting for advanced biofuels is expected to convert "accounting quotas" into "physical volumes," providing a substantial increase in demand for HVO and UCO [4]. - The removal of POME (Palm Oil Mill Effluent) from compliance eligibility is set to take effect in 2027, although its impact is considered limited due to the declining share of palm oil in EU biodiesel feedstocks [4]. - The report suggests a positive outlook for biodiesel across road transport, shipping, and aviation, with specific companies recommended for investment: Shandong Hi-Speed, Hainan Xinneng, Longkun Technology, and Weili [4]. Summary by Sections RED III Legislation Impact - The RED III directive requires EU member states to implement national laws by May 21, 2025, with Germany's legislation already in place [4]. - The overall renewable energy target for the EU is set to reach at least 42.5% by 2030, with a focus on increasing the share of renewable energy in the transport sector to 29% [5]. Company Valuation - Key companies in the sector have varying market capitalizations and profit forecasts, with Shandong Hi-Speed projected to have a net profit of 1.05 billion in 2025, while Hainan Xinneng is currently not forecasted to generate profit [6].

Investment Rating - The industry investment rating is "Overweight" indicating a positive outlook for the sector [4]. Core Insights - The German government has officially passed legislation to implement the EU's Renewable Energy Directive (RED III), which is expected to boost the demand for HVO (Hydrotreated Vegetable Oil) and UCO (Used Cooking Oil) [4]. - The RED III directive, effective from 2023, mandates EU member states to transpose it into national law by May 21, 2025, with Germany setting a higher greenhouse gas (GHG) reduction target of 19% for gasoline and diesel by 2030, compared to the EU's unified target of 14.5% [4][5]. - The cancellation of double counting for advanced biofuels is expected to convert "accounting quotas" into "physical volumes," significantly increasing the demand for HVO and UCO [4]. - The removal of POME (Palm Oil Mill Effluent) from compliance eligibility is set to take effect in 2027, although its impact is considered limited due to the declining share of palm oil in EU biodiesel feedstocks [4]. - The report suggests a positive outlook for biodiesel development across road transport, shipping, and aviation, with specific companies recommended for investment: Shandong Hi-Speed Energy, Hainan New Energy Technology, Longkun Technology, and Weili [4]. Summary by Sections Legislative Developments - The German cabinet's approval of the RED III legislation is a significant step towards enhancing HVO and UCO demand [4]. - The legislation aims to increase the GHG reduction target for the transportation sector, with a gradual rise to 59% by 2040 [4]. Market Implications - The cancellation of double counting is anticipated to enhance HVO profitability, indirectly raising SAF (Sustainable Aviation Fuel) prices due to reduced supply [4]. - The report highlights the importance of monitoring the legislative progress in other EU member states as they implement RED III [4]. Company Valuations - Key companies in the sector are evaluated with projected net profits and market capitalizations, indicating potential investment opportunities [6]. - For instance, Shandong Hi-Speed Energy is projected to have a net profit of 1.05 billion in 2025, with a PE ratio of 33 [6].

Group 1 - The report highlights a significant increase in SAF (Sustainable Aviation Fuel) prices, with EU and China prices reaching $2,500 and $2,960 per ton respectively, marking increases of 39% and 60% since the beginning of 2025 [1][2] - The profit margin for SAF in China is calculated to exceed 4,000 yuan per ton, indicating strong profitability in the sector [1] - The tightening supply of SAF is driven by the upcoming EU and UK verification of a 2% SAF blending ratio, alongside maintenance shutdowns at major production facilities like NESTE [2] Group 2 - The implementation of the RED III legislation in the EU starting in 2026 will raise carbon reduction targets and eliminate the double carbon credit policy for biodiesel produced from used cooking oil (UCO), leading to increased demand for biodiesel and UCO [3] - The projected demand for biodiesel produced from UCO in the EU is expected to rise significantly, with estimates suggesting an increase from 3.74 million tons in 2025 to an additional 4 million tons in 2026 [3] - The maritime sector is also expected to see increased demand for biodiesel, with new regulations requiring a shift towards electric or 100% biofuel-powered vessels by 2030 [3]

Core Insights - The report highlights significant profit growth in municipal environmental companies, particularly in waste incineration power generation and biofuel sectors, driven by capacity expansion and improved operational efficiency [1][5] Waste Incineration Power Generation - Major waste incineration companies reported substantial profit increases in Q3, with notable growth in net profits for companies like Junxin Co. (+47.6%), Hanlan Environment (+28.1%), and Yongxing Co. (+25.6%) [1] - Key factors for profit growth include the commissioning of new projects, asset acquisitions, and enhanced capacity utilization through methods like co-firing aged waste [1][2] - The average profit increase from heat supply per ton of waste is approximately 80 yuan [1] Cash Flow Improvement - Waste incineration companies experienced growth in net cash flow from operating activities, attributed to increased capacity and government subsidy repayments [2] Water Utilities - Water utility companies showed mixed profit results in Q3, with notable declines in net profits for Chuangye Environmental (-10.4%) and Shou Chuang Environmental (-78.4%), while others like Hongcheng Environment (+2.1%) and Chongqing Water (+2.7%) reported growth [3] - The significant drop in Shou Chuang's profits was primarily due to a one-time investment gain from the previous year [3] Biofuels - Biofuel companies saw substantial profit increases in Q3, driven by rising raw material prices and improved sales [4][5] - UCO export prices rose by 16.7%-22.2% year-on-year, benefiting companies like Shangaohuan Energy and Langkun Technology, which reported significant profit recoveries [4] - Despite a decline in biodiesel export sales due to EU anti-dumping duties, companies like Zhuoyue New Energy managed to achieve profit growth through cost control and new production lines [4] - SAF sales volume increased significantly, with prices rising by 42.16%, leading to profitability for companies like Jiaao Environmental [5] Investment Recommendations - The report suggests focusing on waste incineration companies with high dividends and growth potential, such as Guangda Environment, Hanlan Environment, Yongxing Co., and Junxin Co. [6] - It also recommends biofuel companies benefiting from overseas carbon reduction policies, including Shangaohuan Energy and Jiaao Environmental [6] - For the water sector, high-dividend assets like Beikong Water Group and Yuehai Investment are highlighted [6]

Financial Performance - The company achieved a revenue of 958 million CNY in Q3 2025, representing a year-on-year growth of 63.82% [2] - The net profit attributable to shareholders for Q3 2025 was 93.33 million CNY, with a total revenue of 1.942 billion CNY and a net profit of 57.95 million CNY for the first three quarters, marking a turnaround from losses [2][3] - Total liabilities significantly decreased, with a debt ratio of 29.81% as of September 2025, down from 38.99% at the end of 2024, a reduction of 9.18% [2] Operational Improvements - The company capitalized on the rising market for hydrocarbon-based biodiesel, leading to profitability primarily from the bioenergy sector [3] - Innovations in sales strategies and successful execution of long-term contracts with non-EU clients contributed to performance improvements [3] - Key operational metrics improved due to technological innovations and equipment upgrades, resulting in lower processing costs and enhanced risk resilience [3] Accounts Receivable Management - As of September 2025, accounts receivable stood at 503 million CNY, a decrease of 27 million CNY from the previous year [3] - Other receivables dropped to 181 million CNY, down 1.168 billion CNY from the previous year-end [3] - The company implemented measures such as enhanced credit tracking and legal actions to improve collection efficiency, optimizing its asset-liability structure [3] Market Trends and Future Outlook - The average offshore price of ARA SAF reached 2,854 USD/ton as of October 31, driven by regulatory policies and rising demand [4][5] - The company anticipates sustained high demand for SAF due to strengthened enforcement of blending mandates across various regions [5] - The company plans to actively explore domestic and international markets for biofuels, aiming for full production and sales of bioenergy products [5] Strategic Development Plans - Over the next three years, the company aims to focus on green development and technological innovation, aspiring to become a leading global green energy supplier [6] - The bioenergy sector will be the core strategic pillar, with a commitment to long-term investment and efficiency improvements [6] - Plans include enhancing the competitiveness of catalytic purification products and increasing R&D efforts in bioenergy and catalytic purification technologies [6]