Zheneng Jinjiang Environment

[weijian]

This company came onto my radar when I was scanning through SGX's list of share buybacks (SBB). With a market cap of <500mil a few years ago, it started doing SBB in 2024 (3.3mil sgd), followed by ~4mil in 2025. Zheneng Jinjiang Environment listed on the SGX in 2016, paid dividends for 2 consecutive years post IPO before a hiatus and it restarted paying dividends in 2024 (for FY23) that also coincided with the start of SBB. Since it is trading at >50% discount to book and if book value is not grossly overstated, then SBB is highly value accretive.

A brief analysis of the company via specuvestor's ABS framework (asset/business/structure):

Asset
- Balance sheet is ~160% geared up and has another 10% of liabilities in the form of deferred tax liabilities/provisions. Therefore, its capital structure is ~1/3 equity and 2/3 debt/liabilities - which is similar to what Mgt has espoused.

- Capital (debt in this case) is largely used to fund PPE (the WTE plant/machinery), Service concession arrangements (which are capitalized costs of Build-Operate-Transfer accounting) and receivables. As of 1H25, the receivables (owed by local governments where the WTE plants are located) take close to 1 year to collect, with the payment days having almost doubled since covid-19.

Business
- Own and operate WTE facilities (BOT~30% and BOO~70%) in China for concession period of ~25-30years. A WTE ops start out by (a) collecting municipal solid waste (MSW), (b) treat the MSW before incinerating it with coal, © the incineration heat is used to generate electricty and steam.

- Money is made by collecting the MSW and selling electricity/steam. The electricity is sent back to the grid (local gov) and steam is supplied to private mfg firms industries for purposes like sterilization/cooking/curing of products etc. In recent years, it has also started to sell WTE by-products like slag/fly ash to be eventually incorporated into building materials (eg. low carbon concrete)

- Started overseas WTE expansion with India in 2017, using IPO proceeds But with all the China-India border clashes (and not forgetting China supplying Pakistan with warplane in Pakistan's clash with India just in 2025), it simply couldn't even start collecting waste from the local municipal. It stopped ops at 1 of the 3 WTE projects in 2021 and wrote off everything in FY23 before selling them off for a penny in 2024. The singular remaining overseas WTE project is at Indonesia where construction started in 3Q2024.

Structure (probably the most interesting part)
- IPO-ed in 2016 on the SGX, raising 180mil sgd gross proceeds with no vendor sales. Interestingly, it paid out ~120mil in dividends in the next 2 FYs post IPO before stopping the dividend when it started to expand overseas (In India). Then at the same time, it did a 110mil sgd private placement with a new investment fund coming on board. As of writing, all the original IPO vendors are still around with the exception of an investment fund that owned ~6% post IPO but sold out sometime in 2023.

- 3 shareholder groups: (A) Zheneng Group~29.8%, (B) Jinjiang Group (original sponsor at IPO)~25.8%, © 2 investment funds holding a total of ~27.3%. Zheneng Group, the energy SOE of Zhejiang Province became the largest shareholder in 2018 after purchasing its stake from the original sponsor JinJiang Group. Since then, the key mgt has transited from Jinjiang Group to Zheneng Group.

- Between Aug2020 to April 2023, there was a "Romance of the 3 Kingdom" situation --> (i) It started with the 2 investment funds (holding a 27.3% stake) requisitioning an EGM to put their rep on the BOD. (ii) The EGM became an afterthought when Zheneng Group striked a deal with Jinjiang Group (original sponsor at IPO) for their 25.8% stake at 78cents, triggering a MGO for the rest of the shares it didn't own. Unfortunately, the deal eventually lapsed in 6 months when it didn't secure regulatory approval. But before the deal lapsed, the 2 funds signaled their disapproval by voting against the directors' remuneration and re-election of an Independent Director. Since the 2 funds only owned ~27.3%, they did not manage to vote down the resolutions. (iii) Subsequently in Dec2021, "certain shareholders" (in this case, I suspect to be Jinjiang Group) requested Mgt to allow a potential acquirer to do due diligence on the company but it was eventually rejected. At that point of time, the Mgt was coincidentally already from Zheneng Group. (iv) In the next AGM held in April2022, 2 Independent Directors did not get re-elected and the directors did not get their remuneration passed as well. No surprises that the 2 smaller shareholder group (Jinjiang Group + 2 investment funds) had ganged up against the largest shareholder Zheneng Group. (v) Finally in Apri2023, all 3 parties came to a "peace deal" when the 2 funds had their proxy nominated and voted onto the BOD in the AGM. At the same time, with improving fundamentals, the company also restarted a dividend payout for FY23 and the SBB in 2024.

[weijian]

- 3 shareholder groups: (A) Zheneng Group~29.8%, (B) Jinjiang Group (original sponsor at IPO)~25.8%, © 2 investment funds holding a total of ~27.3%. Zheneng Group, the energy SOE of Zhejiang Province became the largest shareholder in 2018 after purchasing its stake from the original sponsor JinJiang Group. Since then, the key mgt has transited from Jinjiang Group to Zheneng Group.

- Between Aug2020 to April 2023, there was a "Romance of the 3 Kingdom" situation --> (i) It started with the 2 investment funds (holding a 27.3% stake) requisitioning an EGM to put their rep on the BOD. (ii) The EGM became an afterthought when Zheneng Group striked a deal with Jinjiang Group (original sponsor at IPO) for their 25.8% stake at 78cents, triggering a MGO for the rest of the shares it didn't own. Unfortunately, the deal eventually lapsed in 6 months when it didn't secure regulatory approval. But before the deal lapsed, the 2 funds signaled their disapproval by voting against the directors' remuneration and re-election of an Independent Director. Since the 2 funds only owned ~27.3%, they did not manage to vote down the resolutions. (iii) Subsequently in Dec2021, "certain shareholders" (in this case, I suspect to be Jinjiang Group) requested Mgt to allow a potential acquirer to do due diligence on the company but it was eventually rejected. At that point of time, the Mgt was coincidentally already from Zheneng Group. (iv) In the next AGM held in April2022, 2 Independent Directors did not get re-elected and the directors did not get their remuneration passed as well. No surprises that the 2 smaller shareholder group (Jinjiang Group + 2 investment funds) had ganged up against the largest shareholder Zheneng Group. (v) Finally in Apri2023, all 3 parties came to a "peace deal" when the 2 funds had their proxy nominated and voted onto the BOD in the AGM. At the same time, with improving fundamentals, the company also restarted a dividend payout for FY23 and the SBB in 2024.

In the Romance of 3 Kingdom situation, it should be 1 of the warring kingdoms making the decisive move. Let's hope that all parties have learnt from 2022 and made the necessary decisions/actions for a "win-win".

HOLDING ANNOUNCEMENT

The board of directors (the "Board") of Zheneng Jinjiang Environment Holding Company Limited (the "Company") wishes to announce that the Company had been approached regarding a possible transaction involving the Company’s shares, which may or may not lead to a possible transaction involving the Company’s shares.

The Company wishes to emphasize that the Board has just made contact with the party that sent the approach letter but no substantive discussions have been held and the Board has not made any decision with respect to, and has not entered into, any agreement for such a transaction

https://links.sgx.com/FileOpen/ZJEHCL%20...eID=874840

---------------------------------

Before the announcement above, the company used to trade at ~0.45x book. And it looks justified based on below:

WTE overcapacity Due to encouragement to build WTE plants in the 13th and 14th 5 year plan (from 2016 to 2025), there has been a huge build-up of new WTE plants (or upgrades to existing plants that expands capacity). As all things in China, overbuilding is a feature and not a bug. Besides the contribution from overbuilding, the MSW (municipal solid waste) growth has also been affected by the slowdown in economic growth, and maybe more importantly contributed by improved ecological mindfulness of "Reduce, Reuse and Recycle" programs since 2017. By 2022, there were only ~90% MSW collected for the available WTE capacity and plenty much were still coming online in the future. By 2025, the worst overcapacity regions (the urban centers near coastal areas) had only avg 70-80% utilization rates while the under capacity ones only have 50-75% WTE capacity. The undercapacity regions will probably stay that way for some time because they are much sparsely populated and their MSW have lower caloric values, all pointing to higher COGS and keeping WTE building away.

Economics of the WTE business. Back in 2020/2021, the company paid an avg interest cost of ~4.8-5%. It's ROIC (PBIT divided by equity+debt) was ~5.5-6%. Therefore, it wasn't really creating anything significant for equity holders and a big discount to book is warranted to account for the "cost of equity".

The losing of subsidies (electricity tariffs). To incentivise the build-out during the 13th and 14th plan, the local gov promise to pay subsidies (electricity tariffs) but it would only be for the 1st 15 years of operations (contrast to ~25-30years of their concession period). Therefore from 2024, individual WTE plants will start to lose these gov support. In addition, the actual payment by the local governments have also been really slow - doubling the time taken to pay up since covid-19 and taking close to 1 year to pay up now. Effectively, with its levered BS, the company is effectively paying ~3-4% for the past few years to subsidize the local government's debt.

[weijian]

- 3 shareholder groups: (A) Zheneng Group~29.8%, (B) Jinjiang Group (original sponsor at IPO)~25.8%, © 2 investment funds holding a total of ~27.3%. Zheneng Group, the energy SOE of Zhejiang Province became the largest shareholder in 2018 after purchasing its stake from the original sponsor JinJiang Group. Since then, the key mgt has transited from Jinjiang Group to Zheneng Group.
- Between Aug2020 to April 2023, there was a "Romance of the 3 Kingdom" situation --> (i) It started with the 2 investment funds (holding a 27.3% stake) requisitioning an EGM to put their rep on the BOD. (ii) The EGM became an afterthought when Zheneng Group striked a deal with Jinjiang Group (original sponsor at IPO) for their 25.8% stake at 78cents, triggering a MGO for the rest of the shares it didn't own. Unfortunately, the deal eventually lapsed in 6 months when it didn't secure regulatory approval. But before the deal lapsed, the 2 funds signaled their disapproval by voting against the directors' remuneration and re-election of an Independent Director. Since the 2 funds only owned ~27.3%, they did not manage to vote down the resolutions. (iii) Subsequently in Dec2021, "certain shareholders" (in this case, I suspect to be Jinjiang Group) requested Mgt to allow a potential acquirer to do due diligence on the company but it was eventually rejected. At that point of time, the Mgt was coincidentally already from Zheneng Group. (iv) In the next AGM held in April2022, 2 Independent Directors did not get re-elected and the directors did not get their remuneration passed as well. No surprises that the 2 smaller shareholder group (Jinjiang Group + 2 investment funds) had ganged up against the largest shareholder Zheneng Group. (v) Finally in Apri2023, all 3 parties came to a "peace deal" when the 2 funds had their proxy nominated and voted onto the BOD in the AGM. At the same time, with improving fundamentals, the company also restarted a dividend payout for FY23 and the SBB in 2024.

In the Romance of 3 Kingdom situation, it should be 1 of the warring kingdoms making the decisive move. Let's hope that all parties have learnt from 2022 and made the necessary decisions/actions for a "win-win".

HOLDING ANNOUNCEMENT
The board of directors (the "Board") of Zheneng Jinjiang Environment Holding Company Limited (the "Company") wishes to announce that the Company had been approached regarding a possible transaction involving the Company’s shares, which may or may not lead to a possible transaction involving the Company’s shares.
The Company wishes to emphasize that the Board has just made contact with the party that sent the approach letter but no substantive discussions have been held and the Board has not made any decision with respect to, and has not entered into, any agreement for such a transaction
https://links.sgx.com/FileOpen/ZJEHCL%20...eID=874840

After a 6months' wait, an offer is finally on the table.

The Offeror (a HK holding company where the largest existing shareholder Zheneng Group only has ~47% ownership) will try to privatize the company with a full cash or new share offer. With the exception of a minority shareholder (~4.6% stake) taking new shares, the 2nd and 3rd largest shareholders, Jinjiang Grp and Investment fund respectively, (total 53.1%) are going to take cash.

This is a Scheme of Arrangement (SOA) and so is an "either all or nothing" transaction requiring 75% of independent votes to pass. Taking away Zheneng Group's 30% share, this means 0.75*0.7 ~ 52.5% is required for the SOA to be approved. The document has stated that a total of 58.1% of shares will accept the offer and so passing the SOA resolution looks like a done deal. At 70cents + 4.5cent special dividend (to paid over 2 tranches), Mr Market's current trading of 65-68cents suggest that there may be some sort of merger arb opportunity available?

To recap back in Oct2020, Zheneng Group agreed to buy over Jinjiang Grp (2nd largest shareholder at ~26%) at 78cents (~0.93x NAV) triggering a mandatory GO for the rest. However it did not secure regulatory approval and the deal was cancelled by April 2021. The current Offerer is not majority owned by Zheneng Group and so I suppose this is the workaround solution.

The current offer of 70cents + 4.5cent special dividend only values Zheneng Jinjiang Environment at ~0.7x NAV, which is a considerable gap from the 2020's offer at 0.93x NAV. So while passing the SOA is a done deal but it remains to be seen if it will pass the requirement of getting the IFA's opinion to be fair and reasonable. To be honest, I was looking for something in the ballpark of ~0.8x NAV. Nonetheless, Offerer has not said that the offer price is final and so there might be more (upside) surprises to come.

PROPOSED PRIVATISATION OF ZHENENG JINJIANG ENVIRONMENT HOLDING COMPANY LIMITED BY WAY OF A SCHEME OF ARRANGEMENT

The Scheme Consideration (as defined below) for each Share is, at the election of each shareholder of the Company (a “Shareholder”), either:
(a) the Cash Consideration (as defined below), being S$0.70 per Share in cash; or
(b) in lieu of the Cash Consideration, the Share Consideration (as defined below) being one (1) new Offeror Share (as defined below), which the Offeror shall allot and issue, duly authorised, fully paid and free from all Encumbrances (as defined below), at the Issue Price (as defined below).

https://links.sgx.com/FileOpen/ZJE%20-%2...eID=905302