On April 28, Luen Mei Quantum(600167.SH), a comprehensive energy service supplier, released its 2021 annual report and the first quarterly report of 2022.

According to the 2021 annual report, the operating revenue is RMB 3.468 billion, with a year-on-year decrease of 3.61%. The net profit attributable to parent company after deducting non-recurring gains and losses is RMB 1.095 billion, with a year-on-year decrease of 24.49%. According to the company, the data changes of operating revenue and net profit were mainly caused by repeated epidemics, sluggish real estate market, rising coal prices, changes in fair value and other reasons. Obviously, the performance in the first quarter of 2022 is steady and promising.

Abundant monetary capital and cash flow drive steady development of the main business

In 2021, with abundant cash flow, Luen Mei Quantum further optimized its asset structure. That year, the net cash flow of operating activities was RMB 1.7 billion, with a large year-on-year increase of 83.31% compared to RMB 930 million in 2020. The company's final cash on hand was RMB 5.46 billion, accounting for 40.48% of the total assets in the same period, which was abundant. The asset-liability ratio is 33.55%, with a year-on-year decrease of 1%.

As reflected in the financial report of Luen Mei Quantum, although the operating revenue and profit growth at this stage is lower than that in previous years, the company still holds steady main business after excluding peripheral factors. Specifically, the heating area grew against the downturn, the adverse factors affecting the operating revenue and profit data were basically eliminated, the cash flow increased significantly, the asset structure was continuously optimized, and the performance was stable in the first quarter of 2022. At the same time, the company continued to reward investors by means of share repurchase and large-scale dividend, and showed confidence in the long-term value of the enterprise.

Growth of Heating Area against the Pessimistic Trend

In 2021, the average heating area supported by Luen Mei Quantum reached about 70.46 million sqm, 2.31 million sqm more than 2020 at a year-on-year growth rate of 3.4%; the area covered by the heating network reached about 92 million sqm, with an increase of 3.15 million sqm and a year-on-year growth rate of 3.5%. Luen Mei Quantum managed to realize the growth of newly added heating area despite the depression caused by both the pandemic and the stagnancy of the real estate industry, and kept its main business stable.

Driven by the goals of peak carbon dioxide emissions and carbon neutrality, northern China is speeding up to weed out small and medium boilers and upgrade existing heating system in terms of energy conservation and emission, resulting in a higher market concentration. According to insiders of the industry, Luen Mei Quantum may retain its advantages in the future market landscape by virtue of its accumulation and smart energy operation abilities in the area of clean energy-based heating.

As the data shows, the company has a planned heating area of 150 million sqm in total. Nearly 80 million sqm of its networked area will be gradually supplied with actual heating.

Expansion of Strategic Businesses such as Hydrogen Energy and Energy Storage

Luen Mei Quantum has seen an increasing performance for a consecutive of more than 10 years with steady operation and strict cash control. By the end of the first quarter of 2022, the monetary capital reached RMB 7.12 billion, accounting for 46.8% of the total assets at the end of the same period. With abundant cash flow and monetary capital, the company can promote the upgrading of comprehensive energy strategies, expand strategic businesses such as hydrogen energy and energy storage, and enhance the core competitiveness of listed companies in a more confident way.

It is worth noting that Luen Mei Quantum brought out a brand new "comprehensive energy strategy upgrading routine" on October 2021, which sought to promote the company's carbon neutrality goal comprehensively by developing low-carbon technologies for energy saving and emission reduction, launching the comprehensive energy business, exploring the electric energy storage market and planning for the hydrogen energy industry.

"Comprehensive energy strategy transformation" is one of the highlights of its business development in 2021. Centering on core products of refrigeration, heating supply, electricity and gas, and combining digital technologies, it integrates the applications of the cutting-edge energy technologies and equipment, providing clients with clean, high-efficiency, safe, stable and comprehensive energy service. While further improving the efficiency of the urban central heating system, it vigorously developed the distributed clean energy technologies to realize the clean upgrading at the source. At the user side, it further improves the service quality, and makes IoT-based efforts to shorten the service response, increase the service accuracy and realize accurate feedback.

The company will also take the planning for hydrogen energy as a priority for its future business. In December 2021, Luen Mei Quantum invested RMB 100 million in INTEGRAL Co., Ltd. The two companies work together to develop the technical standards for hydrogen distributed power generation and hydrogen cogeneration, plan for key equipment and control technologies on a complementary basis.

The company will give full play to its existing industrial resources and capital advantages, strive to make a breakthrough in the business direction of hydrogen cogeneration and hydrogen distributed power generation, and integrate the upstream and downstream industrial core technologies and equipment, especially in the key links such as clean energy hydrogen production, high-pressure hydrogen storage and fuel cells, in which it will actively lay out, form business collaboration, and build the core competence of hydrogen energy development.

Adverse factors for the performance almost ruled out

As the report shows, the company's revenue decline in 2021 on a year-on-year basis is mainly due to the RMB 162 million of 2020 income used to pay the rears, and the company manages to remain its revenue growth in the year by about RMB 30 million after excluding the impact of such income.

Furthermore, the pandemic forces some clients occupying the commercial and industrial properties in the Company-serving areas in Shenyang to stop their business and suspends the government projects of dismantling the scattered heating networks and integrate them into the major network. Such changes, although affecting project and networking revenues in the short term, but of the epidemic, will not undermine its business-protecting advantages in the area.

The impact of increasing coal price on the performance of Luen Mei Quantum is expected to be eliminated gradually. In the previous year, the increase of upstream coal price casts certain pressure on the company cost. The high coal price in 2021 and the relatively great increase in coal consumption and unit price comparing to the previous year led to a large raw material cost rise- the operating cost of RMB 294 million represents an overall increase of 17.82% compared with the same period last year, in which the cost of coal increases by more than RMB 160 million. As currently the coal price is becoming rational and the company is controlling the cost as much as possible though long-term association for locking price and coal storage in the off season, the future business cost is expected to have a year-on-year decrease.

According to the Company, the decline in the net profit attributable to the Parent in 2021 and the decrease in fair value of over RMB 70 million shall mainly be attributed to the plummeting of QI-ANXIN shares held by the Company throughout the year. Nevertheless, it is worth noting that QI-ANXIN manages to have a "good start" in its performance for the first quarter of 2022 and may finally turn itself out of red for the entire year, as shown in its latest financial statement.

The growth of the Company's newly added heating area in 2021 slowed down as a result of the downturn of the real estate industry. Now this impact is offset by various real estate-supporting policies initiated by Shenyang government since 2022. According to market participants, the sluggish real estate market in 2022 is expected to be improved.

The financial statement of the first quarter shows a stable performance of Luen Mei Quantum. During this period, Luen Mei Quantum realized a revenue growth by 2.64% and a year-on-year decrease of 4.4% for the net profit attributable to the parent. The impact of the pandemic and fuel cost increase on the performance gets weaker, as evidenced by the revenue increase and stable net profit comparing to the year 2021. (Source: China Securities Journal)