Interview with Chairman Zheng Guangming by China Securities Journal | Tongxing Environmental Protection is adapting to changes and accelerating the formation of new growth poles

Recently, the chairman of the company, Zheng Guangming, gave an exclusive interview to a reporter from China Securities Journal, conducting in-depth analysis and elaboration on the company's current business situation, industry trends, and future development plans. The full text of the interview is as follows.

Under the influence of multiple factors such as market changes, as a well-known comprehensive service provider for non electric industry flue gas treatment in China, Tongxing Environmental Protection has experienced a decline in performance in recent years. In the face of current industry competition pressure, Zheng Guangming, Chairman of Tongxing Environmental Protection, recently stated in an interview with China Securities Journal that despite the complex and ever-changing market environment, he is confident in seizing opportunities and responding to challenges with solid fundamentals, excellent technical strength, and solid business layout.

Talking about declining performance: Insufficient agility and competitiveness of the operational system

As one of the leading enterprises in the research and development, production, sales, and preparation technology of low-temperature SCR denitrification catalysts in China, Tongxing Environmental Protection's main partners include top non electric industry customers such as Baowu Iron and Steel and Jizhong Energy, and has a say in the industry. After years of deep cultivation, Tongxing Environmental Protection's previous business performance was quite impressive. Financial data shows that from 2016 to 2022, the compound annual growth rate of the company's revenue was 40%, and the compound annual growth rate of net profit was 47%.

However, in recent years, the company's performance has declined due to factors such as low prosperity in downstream industries such as steel, coking, papermaking, and cement, reduced order releases, and fierce market competition. In addition, the company's operational system lacks agility and competitiveness.

This year's overall performance has improved, but we need to deeply reflect on the decline in performance over the past two years, "Zheng Guangming told reporters.

Tongxing Environmental Protection has conducted a detailed analysis of the decline in performance in 2023, which is mainly due to two reasons: firstly, the decrease in revenue, resulting in a net profit decrease of 32.1036 million yuan; The second reason is the decrease in gross profit margin, resulting in a decrease of 55.0831 million yuan in net profit.

The reporter learned from the interview that Tongxing Environmental Protection's performance decline in 2023 is closely related to some situations in 2022. In order to fully strive for high-quality orders, the company's order reserve for the whole year of 2022 was insufficient, resulting in an insufficient balance of orders for that year and abnormal performance in 2023. At the same time, weak market demand and fierce industry competition have directly affected the prices of the company's catalyst products, resulting in a year-on-year decrease of 17.85% in the gross profit margin of the catalyst business and directly affecting the company's net profit.

Although there are some objective reasons for the decline in performance, the main reason is that the agility and competitiveness of the operational system are not strong enough, and the organization is rigid, the processes are cumbersome, and cooperation is not smooth, resulting in low operational efficiency. Zheng Guangming admitted that these problems must be solved, and as long as we make up our minds and take appropriate measures, they can also be solved.

Talking about coping strategies: promoting organizational change and improving operational efficiency

In order to enhance the agility of the operational system, the company held an internal management change seminar in early October 2023, with the theme of 'Great Discussion on Adapting to the Market Environment's Operational System Change'. Zheng Guangming told reporters that the tone set at that time was to integrate and learn from advanced enterprise practices, such as learning from benchmark enterprises' excellent operational concepts, extreme cost control, and excellent enterprise performance management methods.

After the big discussion, it became a consensus throughout the company to vigorously promote organizational change. In this organizational transformation, the establishment of business units, performance changes, the transformation from a general to a company commander, and digital transformation have become key drivers.

In order to reduce hierarchy, we have abandoned the previous hierarchical organizational structure and established the Engineering Division, Catalyst Division, and CCUS (Carbon Capture, Storage, and Utilization) Division to improve our operational management level, "said Zheng Guangming.

When it comes to thinking about establishing a business unit, Zheng Guangming believes that the business unit should implement independent accounting, have the right to use human resources, decision-making power, distribution power, etc., and achieve "decentralization, responsibility, and profit sharing". At the same time, the company actively carries out performance reforms, distributing performance bonuses based on value contributions to maximize employee motivation and creativity.

"In fact, it is also through the implementation of the business division model that the overall operating efficiency of the company has been comprehensively improved. In particular, the overall performance of the engineering business division this year exceeded expectations. By the end of October 2024, the total amount of new contracts signed in the engineering field had reached 419 million yuan, up 16.71% year on year. The business of the catalyst business division has also improved, and by the end of October 2024, the total amount of new contracts signed in the catalyst field had reached 225 million yuan, up 3.14% year on year." Zheng Guangming said that since the start of the reform of the business division, it has played a very significant role in promoting enterprise operations.

In terms of performance evaluation, Tongxing Environmental Protection is also vigorously reforming, focusing on key indicators such as revenue, profit, and cash flow. For example, the assessment of design managers is carried out from three dimensions: orders, profits, and cost reduction. Performance accounts for 40% of revenue, and its essence is to promote the actual conversion of project design into orders. This forces design managers to go deep into the site to obtain users' real needs, and clarify the differences with competitors through in-depth communication with users, thereby effectively enhancing their strengths and weaknesses, and assisting in order conversion.

The overall appearance of the company's executive team is also undergoing changes. "In Zheng Guangming's view, executives must sink in," generals "should go down to the grassroots level as" company leaders, "and each R&D project should be led by executives as" product managers "to accelerate progress.

In conjunction with the reform of the business unit system, now the company's executives have been assigned to each business unit and fully responsible. Under the independent business model, the success or failure of business expansion is evident. This requires executives to personally lead teams to find customers, discuss pain points, and promote projects, work from the customer's perspective, and 'bend' into the customer's' situation '. Once the performance is good, the team's enthusiasm will naturally be sufficient, "said Zheng Guangming.

After the management organizational system is gradually streamlined, it is urgent to implement refined cost control. It is reported that Tongxing Environmental Protection is vigorously promoting the whole process cost reduction work, focusing on exploring cost reduction opportunities from marketing, design, production, procurement, delivery and other links. Compared to last year, the overall cost reduction effect of the company has been very significant through ideological indoctrination and assessment guidance. As of the end of October 2024, the company's operating costs have decreased by 28.1573 million yuan compared to the same period last year, a year-on-year decrease of 25.85%, "said Zheng Guangming.

It is worth mentioning that in order to improve organizational operational efficiency and carry out digital transformation of business, Tongxing Environmental Protection has specifically established a digital project team. In early November, the launch conference for the first phase of Tongxing Environmental Protection Data Consulting Planning and Operation Analysis project was held, which clarified the detailed promotion plan and work requirements for digital transformation, laying a solid foundation for business digitization.

Talking about future planning: striving to cultivate new growth poles

The development of the industry is closely related to policies. With a series of policy supports, the company's multiple businesses are expected to usher in new opportunities for development. When it comes to future plans, Zheng Guangming is full of confidence in the company.

Zheng Guangming stated that the company's traditional flue gas treatment business will focus on high-value products and high-value customer groups, and strive to reduce costs and increase efficiency to enhance competitiveness. At the same time, based on the current industry development trend and market demand, the company is actively expanding new carbon reduction business segments and striving to cultivate new growth poles. Firstly, it is accelerating the development of CCUS business. Secondly, it is forward-looking in the research and development, production, and service of key materials and devices for sodium ion batteries.

Absorbent is a key technology for carbon capture. The TX-1 carbon capture absorbent independently developed by the company adopts exclusive antioxidant technology, which extends the operating life by 20 to 300 times compared to traditional monoethanolamine. Under the classic process, the regeneration energy consumption reaches the international advanced level. "Zheng Guangming excitedly introduced to the reporter that the company's carbon capture absorbent has greatly improved the working efficiency and long-term operational reliability of the carbon capture system with excellent performance, and has been favored by the market.

Zheng Guangming gave an example to reporters: "A large domestic enterprise found that the stability and antioxidant capacity of a well-known supplier's product were not ideal after trying it out. Therefore, they approached us and tried samples from multiple companies, including ours, before finally ordering our absorbent

With the gradual expansion of the CCUS industry, relying on advanced technology and the advantage of being a first mover in industrial demonstration, the company is expected to make CCUS business its main business, while continuously breaking through in technology and expanding the 'moat', "said Zheng Guangming.

While CCUS business is rapidly expanding, Tongxing Environmental Protection's sodium electricity business is also steadily advancing.

It is reported that in January 2024, Tongxing Environmental Protection and the R&D team of Southwest University jointly established Hefei Haosheng New Energy Technology Co., Ltd., which focuses on the research and development, production, and service of key materials and devices for sodium ion batteries. Currently, it has the production capacity of 200 tons of positive electrode materials for sodium ion batteries per year. It is reported that the performance of the first generation of Haosheng New Energy pilot products has reached the domestic first-class level, and samples have been sent to some downstream customers for testing.

Recently, the CINE 2024 China International Sodium Battery Technology Exhibition was held in Shenzhen. Haosheng New Energy was invited to participate in the exhibition, and the sodium ion battery cells made of Haosheng sodium ion materials and Haosheng positive electrode materials have received widespread attention. Many downstream customers have shown great interest in Haosheng sodium positive electrode materials.

Due to its excellent stability and cost advantages, Haosheng's new energy sodium positive electrode material can be widely used in energy storage, two wheeled electric vehicles, low-speed electric vehicles, and other fields. It is reported that Haosheng New Energy has purchased 183 acres of land with the aim of further expanding production capacity.

At the same time, Zheng Guangming talked about his thoughts on mergers and acquisitions. When the industry is in a bottleneck or facing difficulties, mergers and acquisitions are the key to breaking through. Of course, the prerequisite is to have a precise and profound judgment of the industry trend and make high-quality mergers and acquisitions. "Zheng Guangming told reporters that since the establishment of Tongxing Environmental Protection, it has successfully acquired Beijing Fangxin Lihua.

Zheng Guangming recalled: "At that time, the other party had been operating for three years, with an overall loss of 30 million yuan. But out of our understanding of its technological progressiveness and insight into the market space behind it, we made a bold decision to invest more than 30 million yuan, and successfully acquired 70% of its equity. After several years of operation, Fangxin Lihua Catalyst has become a leading brand in the industry."

In Zheng Guangming's view, when the industry is still in a downturn, it is often a good time for mergers and acquisitions, and low-priced high-quality assets and enterprises with leading technology are worth paying attention to. According to Zheng Guangming, the company is conducting in-depth research on mergers and acquisitions around its future strategic development direction, and has formed an investment research team to track and study some projects. At the same time, it is also focusing on overseas companies with leading technology.

At the end of the interview, Zheng Guangming specifically mentioned his understanding of achieving employee success and promoting innovation among all staff. He said, "The foundation for the company to achieve its future business goals is all employees. We will further learn from the innovation experience of benchmark enterprises and promote employee 'maker oriented' by building an innovation system. The company has formulated a research and development innovation incentive system, and 5% to 10% of the profits generated from innovation will be rewarded to innovators." In Zheng Guangming's view, employees have enthusiasm and creativity, the organization is strong, the company's management can steadily improve, and shareholders and investors will have better returns.

(Source: China Securities Journal Reporter: Qiao Xiang)