Mr Lin Yan, 46, founder and director of CUGU, at Thursday's meeting with analysts. Photo by Leong Chan Teik
IN CHINA, converting household and industrial garbage into electricity is a profitable business, especially so when the government is right behind you.
That is clearly reflected in the financials of CUGU Environmental Protection International, which C&G Industrial has proposed to acquire 100% of.
The financials were released by C&G on the SGX website on Thursday (May 21) and during its meeting with analysts, remisiers and dealers on the same day. (For the PowerPoint presentation material, click here)
CUGU’s profit after tax has risen steadily, from RMB 5.6 m in 2006 to RMB 7.0 m in 2008.
The gross profit margin has hovered around 50% and revenue has doubled.
These financials are attributable to the sole waste-to-energy power plant in Jinjiang city, in Fujian province, belonging to CUGU.
The plant has been operating at - according to its founder and director, Mr Lin Yan - 100% capacity, or close to 100%, in those years.
| RMB’000 | 2006 | 2007 | 2008 |
| Revenue | 30,692 | 44,598 | 66,631 |
| Gross profit | 14,078 | 22,221 | 33,329 |
| Profit before tax | 5,608 | 10,303 | 12,259 |
| Profit after tax | 5,608 | 6,774 | 7,031 |
At full capacity, the plant converts 600 tonnes of waste a day into electricity. Phase 2 of the plant began operations in December 2008 with 150 tonnes of daily treatment capacity. Recently, work began on adding another 250 tonnes of daily treatment capacity.
Asked about the sharp rise in revenue and profit even when the plant was operating at 100% capacity between 2006 and 2008, Mr Lin, 46, said, among other reasons, the fee paid by the government has jumped by nearly 50%. The fee comprises the electricity tariff, a subsidy and a 'tipping fee'.
It should also be noted that the RMB 66.6 m revenue reported for 2008 consists of RMB 14 m in revaluation of the plant.
Cai Junyi, CEO, C&G Industrial.
Government payment
On how CUGU’s business model worked, Mr Lin explained that government trucks collect garbage and deliver them free of charge to the CUGU plant.
The government is obliged to offtake all the electricity that is produced by the plant, which is fed into the national grid.
Depending on the heat value of the waste, each tonne can generate between 180 and 300 kwh of electricity at the CUGU plant, net of the energy needed for the production.
Currently, CUGU’s plant is the only one in Jinjiang city, and there is no prospect for another plant as there would not be sufficient garbage in the city to feed the second plant, said Mr Lin.
Aside from the Jinjiang plant, CUGU has secured three other projects, also under a Build-Operate-Transfer arrangement with the government which offers long concession periods (the Jinjiang concession runs out in 2035).
Operators enjoy a steady stream of income and a off-take agreement with the government.
The combined daily treatment capacities of the other three plants to be built by CUGU, starting next year, is 2,000 tonnes a day. The contribution of these new plants to C&G's bottomline is expected to be substantial, but there will be earnings per share dilution as a result of the shares to be issued to pay for the acquisition of CUGU.
According to CUGU management, there are high business barriers to entry as a BOT operator must have an operating track record and technical expertise.
Financial strength is critical too, as the operator's registered capital generally accounts for 20-35% of the total investment. To obtain financing from banks, the operator needs to have an established credit status.
C&G shareholders will vote on the proposed acquisition in August.
C&G stock's 52-week trading range:
In earlier stories, we have covered other key aspects of the proposed acquisition. Check out:
C&G to issue Rmb 360m of shares at 121% price premium
C&G: From staid textile to sexy waste-to-energy
