The sanitation industry, once a government-operated service, has evolved into a competitive market. Zhonghuanjie Group Co., Ltd. ("Zhonghuanjie"), a specialized sanitation company, is now pushing for an IPO on the Beijing Stock Exchange after three rounds of inquiries.
**Government-Driven Business with Regional Advantages** Zhonghuanjie’s core operations involve urban and rural sanitation services, including road cleaning, waste collection, green space maintenance, waterway cleaning, and public toilet management—accounting for 98% of its revenue.
As a labor-intensive business, Zhonghuanjie employs around 25,000 workers, with labor costs dominating expenses. Its clients are primarily local urban management authorities, with contracts secured through public bidding.
The company’s strongest foothold is in northeastern China, particularly Shenyang, where it holds a 30% market share in sanitation services. In 2024, the region contributed over 35% of revenue, with gross margins nearing 40%—far higher than other areas. Factors include lower labor costs due to sparse population density and additional revenue from winter snow removal. Key projects in Shenyang’s Tiexi, Sujiatun, and Dadong districts reported gross margins of 35.5%, 39.3%, and 51.0%, respectively.
**Shrinking Contracts and Expiring Key Projects** Unlike utilities with long-term concessions, sanitation contracts typically last only three years. Zhonghuanjie’s total contracted value in 2024 was RMB 7.5 billion, with an annualized value of RMB 2.5 billion, reflecting short-term commitments.
The industry is highly fragmented, with over 10,000 competitors and only 324 companies generating over RMB 100 million annually. Zhonghuanjie ranks eighth nationally but holds just 1.1% market share.
Worse, the sanitation market’s growth has plateaued. While annual contract values rose from RMB 68.6 billion in 2020 to RMB 95.5 billion in 2024, the market’s "commercialization rate" has reached 88%, leaving little room for expansion. In H1 2025, industry-wide contract values fell 3% YoY—the steepest decline in a decade.
Zhonghuanjie’s contracted value has dwindled from RMB 9.6 billion in 2022 to RMB 7.1 billion by Q3 2025. Compounding the issue, four high-margin Shenyang projects—contributing RMB 571 million annually—are set to expire in 2026–2027.
**Overdue Receivables Crisis** Despite modest revenue growth (RMB 1.9 billion in 2021 to RMB 2.2 billion in 2024), Zhonghuanjie’s receivables ballooned from RMB 570 million to RMB 1.75 billion—a threefold increase. By Q3 2025, receivables hit RMB 1.81 billion, with 80.5% overdue and a dismal 9.2% recovery rate.
The problem is concentrated in Shenyang, where high-margin projects ironically yield the worst collections. In 2024, credit impairment losses reached RMB 89.5 million, eroding profits.
Cash flow is equally strained. While net profit totaled RMB 200 million in 2024, operating cash inflow was just RMB 80 million. Over 2021–2025, cumulative operating cash flow (RMB 477 million) covered only 54.7% of net profit.
Peers like Yuhetian and Qiaoyin report better cash conversion (88.8% and 75.4%, respectively). Zhonghuanjie now relies on short-term borrowing (RMB 1.1 billion due by Q3 2025) against just RMB 179 million in cash. Its IPO aims to raise RMB 610 million to address this liquidity crunch.
Comments