Insights from Tongxing Technology Chairman Zheng Guangming | Tongxing adapts to change with change, accelerating the formation of its new growth pole

​​Recently, Mr. Zheng Guangming, Chairman of Tongxing Environmental Protection, granted an exclusive interview to a reporter from China Securities Journal.​​ The interview covered the company's current operations, industry dynamics, and future development plans. The full text of the interview follows.

Affected by multiple factors including market fluctuations, Tongxing Environmental Protection Technology Co., Ltd., a leading comprehensive service provider for flue gas treatment in China's non-power industries, has experienced a decline in performance in recent years. Facing intense industry competition pressure, Chairman Zheng Guangming expressed confidence in an exclusive interview with China Securities Journal that despite the complex and volatile market environment, TEP is well-positioned to seize opportunities and meet challenges, leveraging its solid fundamentals, strong technical capabilities, and robust business layout.

​​On Performance Decline: Insufficient Agility and Competitiveness of Operations System​​

As one of the leaders in China in the R&D, production, sales, and preparation technology of low-temperature SCR denitration catalysts, TEP's major partners include top non-power industry clients like Baowu Steel Group and Jizhong Energy Group, granting it significant industry influence. After years of deep cultivation, TEP's performance was previously robust. Financial data shows that from 2016 to 2022, the company achieved a compound annual growth rate (CAGR) of 40% in revenue and 47% in net profit.

However, in recent years, performance has declined due to factors including low market confidence in downstream industries like steel, coking, papermaking, and cement, reduced order releases, intense market competition, and critically, ​​insufficient agility and competitiveness within the company's own operational system.​

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"Overall performance has improved this year, but we need profound reflection on the performance decline over the past two years," Mr. Zheng told the reporter.

TEP conducted a detailed analysis of the 2023 performance decline, identifying two main reasons: First, a decrease in revenue led to a net profit drop of 32.1036 million yuan. Second, a decline in gross profit margin led to a net profit drop of 55.0831 million yuan.

The reporter learned that TEP's 2023 downturn is closely linked to circumstances in 2022. To focus on securing high-quality orders, the company did not maintain sufficient order reserves throughout 2022, resulting in an inadequate backlog carryover into 2023, which caused an abnormal performance dip. Simultaneously, weak market demand and fierce industry competition directly impacted the prices of TEP's catalyst products, leading to a 17.85% year-on-year decline in the catalyst business gross margin, significantly impacting net profit.

"While there were objective factors in the performance decline, the main reason was the insufficient agility and competitiveness of our operational system. Organizational rigidities, cumbersome processes, and poor collaboration led to low operational efficiency," Zheng candidly admitted. He stressed that these problems must be addressed, and with determination and appropriate measures, they can be solved.

​​On Response Strategy: Driving Organizational Reform, Enhancing Operational Efficiency​

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"To enhance the agility of our operational system, in early October 2023, we held an internal management reform seminar centered on the theme of 'Grand Discussion on Operational System Reform to Adapt to the Market Environment'," Zheng told the reporter. The key focus was to integrate best practices from leading companies, such as learning from benchmark enterprises' excellent operational concepts, extreme cost control, and superior enterprise performance management methods.

After this discussion, ​​forcefully promoting organizational reform​​ became a consensus throughout the company. Key measures in this transformation include establishing business divisions, overhauling performance management, ​​"deploying executives to front-line positions"​​ , and driving digital transformation.

"To reduce hierarchy, we abandoned our previous functional structure and established an Engineering Division, a Catalyst Division, and a CCUS (Carbon Capture, Utilization, and Storage) Division, aiming to enhance operational management levels," Zheng explained.

Elaborating on the rationale behind the divisional structure, Zheng stated that each BD operates with independent accounting and holds authority over hiring, decision-making, and resource allocation, ensuring "decentralization of responsibilities and benefits." Concurrently, the company implemented performance reforms, distributing bonuses based on value contribution to maximize employee motivation and creativity.

"In fact, it is precisely through adopting this divisional model that the company's overall operational efficiency has been comprehensively enhanced. Notably, the Engineering Division's performance has exceeded expectations this year. As of the end of October 2024, new engineering contracts totaled 419 million yuan, a year-on-year increase of 16.71%. Catalyst Division performance also improved, with new catalyst contracts totaling 225 million yuan in the same period, up 3.14% year-on-year," Zheng shared. He emphasized the significant positive impact of the divisional reform on the company's operations since its launch.

In performance assessment, TEP has also initiated major changes, focusing evaluations on key metrics like revenue, profit, and cash flow. For example, Design Managers are assessed across three dimensions: orders, profit, and cost reduction, with performance accounting for 40% of their compensation. This essentially drives design projects to convert into actual orders, compelling managers to engage deeply on-site to understand real customer needs, identify differentiation from competitors through in-depth discussions, and effectively leverage strengths while addressing weaknesses to boost order conversion.

"The demeanor of our senior management team is also changing," Zheng remarked. Executives must immerse themselves; "Generals" go down to the front lines as "Company Commanders." Each R&D project is now led by an executive acting as the "Product Manager" to accelerate progress.

"Aligned with the BD reforms, executives are now assigned to and fully accountable for their respective divisions. Under this independent operation model, the results of business development become immediately apparent. This requires executives to personally lead efforts to find clients, discuss pain points, and promote projects, working from the customer's perspective, personally engaging in the customer's 'context' ('bowing into the situation'). Naturally, with good performance, the team's motivation increases," Zheng said.

​​On Cost Control & Digital Transformation:​

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With the management structure gradually streamlined, refined cost control became urgent. TEP is vigorously promoting cost reduction across the entire process, focusing on identifying opportunities in marketing, design, production, procurement, and delivery. "Compared to last year, through instilling cost-consciousness and assessment guidance, the company's overall cost reduction effect is very clear. By the end of October 2024, operating costs decreased by 28.1573 million yuan year-on-year, a decrease of 25.85%," Zheng stated.

Significantly, to enhance organizational operational efficiency and enable business digitalization, TEP has established a dedicated Digital Project Team. In early November, TEP convened the kick-off meeting for Phase 1 of its Data Consulting Planning and Operational Analysis project, detailing the digital transformation roadmap and requirements, laying a solid foundation for business digitization.

​​On Future Plans: Striving to Cultivate New Growth Engines​

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"Industrial development is closely linked to policy. With the support of a series of policies, several of our businesses are poised to embrace new development opportunities," Zheng expressed strong confidence in the company's future when discussing plans.

Zheng stated that TEP's traditional flue gas treatment business will focus on high-value products and customer segments while driving cost reductions and efficiency improvements to enhance competitiveness. Simultaneously, based on current industry trends and market demand, the company is actively expanding new decarbonization business segments, striving to cultivate new growth engines: ​​first, accelerating the development of CCUS business; second, proactively investing in R&D, production, and services for key materials and components of sodium-ion batteries.​

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​​Focus on CCUS:​

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"The absorbent is key to carbon capture technology. Our independently developed TX-1 carbon capture absorbent, utilizing proprietary antioxidant technology, extends operational lifespan by 20-300 times compared to traditional monoethanolamine (MEA). Under classic processes, its regeneration energy consumption reaches internationally advanced levels," Zheng enthusiastically introduced. The absorbent's superior performance significantly enhances the efficiency and long-term reliability of carbon capture systems, gaining market favor.

Zheng provided an example: "A large domestic enterprise tried products from a well-known supplier but found stability and oxidation resistance unsatisfactory. They approached us and tested samples from us and several other companies before ultimately ordering our absorbent."

"As the CCUS industry scales up, leveraging our advanced technology and first-mover advantage through industrial demonstration, we aim to build CCUS into a core business while achieving continuous technological breakthroughs to broaden our 'moat'," Zheng stated.

​​Focus on Sodium-ion Batteries:​

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Alongside rapid CCUS expansion, TEP's sodium battery (Na-ion) business is also progressing steadily.

In January 2024, TEP, in collaboration with a Southwest University R&D team, established ​​Hefei Haosheng New Energy Technology Co., Ltd.​​, focusing on the R&D, production, and service of key Na-ion battery materials and components. It currently has an annual production capacity of 200 tons of Na-ion cathode materials. Reportedly, Haosheng's first-generation pilot products achieve top-tier domestic performance and have been sent for testing to some downstream customers.

Recently, Haosheng participated in the CINE 2024 China International Sodium Battery Technology Exhibition in Shenzhen. Its sodium-ion materials and the sodium-ion cells made using its cathode materials drew widespread attention, with multiple downstream customers showing significant interest.

Due to excellent stability and cost advantages, Haosheng's Na-ion cathode materials can be widely used in energy storage, electric two-wheelers, and low-speed electric vehicles. It is understood that Haosheng has purchased 183 mu (approx. 12.2 hectares) of land to further expand production capacity.

​​On Strategic Mergers & Acquisitions (M&A):​

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Zheng also shared his perspective on M&A. "During industry bottlenecks or challenging periods, M&A can be key to breaking through, contingent on having accurate and profound judgment of industry trends to pursue high-quality deals," Zheng said. He highlighted TEP's successful acquisition of Beijing Fangxin Lihua in the past.

"At that time, they had been operating for three years with total losses of 30 million yuan. However, understanding the advanced nature of their technology and the market potential behind it, we boldly invested over 30 million yuan to acquire 70% equity. After several years of operation, Fangxin Lihua catalysts have become a leading industry brand," Zheng recalled.

In Zheng's view, industry downturns often present good M&A opportunities, with undervalued quality assets and technology-leading companies being worthy of attention. He revealed that TEP is conducting in-depth research on M&A aligned with its future strategic direction, has formed an investment research team to track projects, and is also exploring technologically advanced overseas companies.

​​On Employee Empowerment and Innovation:​

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At the end of the interview, Zheng specifically mentioned his views on empowering employees and fostering innovation across the entire organization. "The foundation for achieving TEP's future operational goals is the entire workforce. We will further study the 'all-employee innovation' practices of benchmark companies. By building an innovation system, we aim to empower employees to become 'intrapreneurs'. The company has established an R&D innovation incentive system, rewarding innovators with 5% to 10% of the profit generated by their innovations in that year," Zheng stated. In his view, motivated and creative employees build a stronger organization, leading to steady improvement in company operations and better returns for shareholders and investors.