The heat supply industry is a special industry involving guarantee for people’s livelihood. The downstream prices are set uniformly, and the upstream purchasing prices are fluctuating in line with the market conditions. In such a limited space, the company has “made a big success”. It has maintained a rapid and stable growth for more than a decade on end in business performance. The heat supply service provided by the company has been widely recognized by the downstream users, having achieved an overall win-win result for the interests of shareholders, customers and the company itself.

Recently the reporter of Securities Daily has visited Luen Mei Quantum to explore the reason behind the rapid development of the company.

An arduous transformation

Towering chimneys, wide coal sheds, and clean and neat workshops. The reporter of Securities Daily found no dirty and messy conditions in the large heat source plant at the headquarters of Luen Mei Quantum located at Hunnan of Shenyang, Liaoning Province.

The predecessor of the company is Dawn Garments, which was mainly engaged in garment manufacturing and went public at Shanghai Stock Exchange in 1999. Later the company fell into a difficult situation and was restructured. In 2001, under the support of Shenyang Municipal Government, through assets swap, Nanke Group became its new controlling shareholder. Later the company was renamed as Shenyang Xinkai, whose main business shifted from the garment industry to the land consolidation and public utilities and services such as heat supply and water supply of Hunnan New District.

Through the initial transformation, it got out of the crisis of delisting. However, in the subsequent years, the company’s net profit after deducting its non-recurring gains and losses had been lingered between profit and loss. At the best time, its profit was only millions of yuan, which had not completely changed its situation.

The company had not entered a new development stage until Luen Mei Group became its new controlling shareholder. Through asset conversion, its main business was focused on the fields of clean heat supply.

“At the start of transformation, the company was in a typical state of pulling a small carriage with a large horse. Its original investment was out of tune with the growth of its heat supply area. Due to historical reasons, its management failed to effectively control its supply of products.” Zhang Xuesen, a controlling director and CEO of Luen Mei Quantum, told the reporter of Securities Daily, “The mentality confirmed by the company at that time was to enhance the utilization rate of assets and cut the operating costs. Through methods such as restructuring the operating organization, shrinking the accounting unit and strengthening internal assessment, we aimed to improve the activeness and sense of business of the employees.”

In 2005, Luen Mei Quantum finished the change of equity and renewed the board of directors and board of supervisors. Led by the new management team, the company’s operating costs were controlled, its internal management became smoother gradually and its performance was improved. According to data, through calling in arrears and stepping up the effort of fees collection, the company’s receivables that year was 70% less than the previous year.

2006 was the first complete operating year after it was restructured by Luen Mei Quantum as well as the first year of development in the new journey of the company. Though the coal price remained high at that time, the company turned losses into gains through a multitude of measures. The company established a mentality of an innovative enterprise, namely depending on its scientific research fruits to enhance the economic benefits and realize a saving and environment-friendly development. From then on, Luen Mei Quantum entered a fast track of development, growing in the scale of its clean heat supply business and its earning power.

Focusing on “coal”

After overcoming the difficult of restructuring, Luen Mei Quantum worked steadily to realize a robust and stable growth in business performance for 13 years on end. From 2006 to 2018, its business income increased by nearly 22 times and its net profit increased by 389 times. During the first half of 2019, its business income was RMB 1.645 billion, a year-on-year growth of 9.72%; its net profit was RMB 815 million, a year-on-year growth of 26.10%.

Zhang Xuesen told the reporter, “We are mainly engaged in clean heat supply business. Whether we can do a good job will determine whether all households can enjoy a comfortable winter, whether the enterprises can guarantee their production safety, and also concern the investment interests of tens of thousands of shareholders and the well-being of over three thousand employees. We must do it well. This is our mission and responsibility.”

The heating price is determined uniformly by the government, and the purchasing follows the price fluctuation. Many people see heat supply as a “suffocating” industry “squeezed from the top and the bottom”. However, in the eyes of Zhang Xuesen, heat supply is an industry with a high threshold. Heat supply is a rigid demand. As long as the operation goes well, we can gain a steady profit continuously.

According to data, since 2006, the earning power of Luen Mei Quantum has improved steadily. Its gross profit rate was far higher than the industry’s average level. Its annual report of 2018 showed that nearly 80% of its income and profit came from the heat supply business and its overall gross profit margin reached 52.56%.

Technical innovation and refined and intelligent management have become the core factors for the company to keep improving its earning power. Zhang said, “In 2006, through a survey of multiple parties, we have confirmed a mentality of seeking benefits from technology and management. We will resolve the key technological issues of boilers burning low-caloric coal and actively replace traditional energy with ground source and water source heat pump technology.”

“We have not just emphasized burning efficiency. The low-caloric brown coal is rich near Shenyang. So we design and customize the most suitable boilers based on the most economical and applicable local coals.” Zhang Xuesen told the reporter, “In order to tackle the issue of coal, we cooperate with colleges and universities in development. Before determining the model of boilers, we have launched technological verification round after round to guarantee a high consistency between the model of boilers and fuel coal. In procurement, we have adopted measures such as storing coal during the slack season. Our branches and subsidiaries such as Xinbei Thermal Electricity and Guorun Low-carbon have even introduced special trains for transporting coal into the plants, which has reduced our transport costs and consumption to the largest extent.”

When the reporter was interviewing with the company, the workers were inspecting and debugging the equipment before heat supply. Zhang pointed at a row of clean green boilers in the thermal plant and told the reporter, “Our unique boilers need not burn high-specification steam coal as average enterprises do. They are economical and efficient even if it’s the commonest brown coal.”

“We have a water source heat pump project with the largest installed scale of a single unit in China. Our subsidiary Guohui New Energy is a high-tech enterprise as well as a post-doctoral innovative practice base of Liaoning Province.” Zhang told the reporter.

“Heat supply is a complex industry, involving many links and a long chain. If management is not improved, and some negligence occurs in every link, they will accumulate into a big problem”. Zhang told the reporter, “For example, in terms of heat supply network, we aim to utilize 99 tons out of 100 tons that is delivered out of the thermal plant. So with the same heat, we can supply it to more users. At the end of charge collection, we have controlled it by household with a strict audit and evaluation system. It’s the foundation to guarantee our high performance to control each detail accurately.”

Expanding new space

Depending on its accumulation of industrial capacity and capital strength, Luen Mei Quantum is planning to expand its market and industrial collaboration.

Zhang told the reporter, “First, there is space of improvement for the clean heat supply business. After the restructuring in 2016, Guohui New Energy and Shenyang Xinbei went public. With the further promotion of urban construction of Shenyang, there is still space of growth for the heat supply area served by the company. Besides, our copying in other areas has also been accelerated. In May this year, we purchased Shandong Fulin Thermal project and deployed the huge local market of industrial steam.”

He said, the company was able and willing to expand into more markets and match the heat supply demands of different regions with customized environment-friendly heat supply technologies. In the future, the company will speed up its expansion of clean heat supply through three modes, “self-building, purchasing and energy management”.

“The current economic situation has brought us a lot of opportunities.” Zhang argued, “The anticipated decline of asset price is a good chance. We can be better and stronger depending on our advantages in capital, market and talents.”

In addition to its own prominent competitiveness, the clean heat supply business of Luen Mei Quantum had also been supported by policies. Recently, the National Development and Reform Commission released a “letter on soliciting the opinions on the notification on solving related issues in the promotion of clean heat supply such as conversion from coal to gas and conversion from coal to electricity”, requiring that each area should expand the different clean energy supply methods according to local conditions to guarantee the balanced development of clean heat supply. Zhang believed that this was highly consistent with the development directions of the company in the two fields, concentrated heat supply with clean coal and supply heat supply with biomass energy.

Nowadays the heat supply area of Luen Mei Quantum had increased from over 3 million ㎡ at the beginning to today’s 81 million ㎡. Last year, through purchasing Zhaoxun Media, it began to enter the field of high-speed railway media, forming a new pattern of clean heat supply and high-speed railway media.

Zhang said, “The company will continue to insist on prudent operation based on the double-business development pattern of clean heat supply and high-speed railway digital media and reach a new height.”

（source：Securities Daily）