What do investors think of GEM (Green Eco-Manufacture) stock?

Industry development logic and cycles: Resource recycling and new energy materials industries are driven by the global carbon neutrality trend, with clear long-term demand. The new energy battery materials sector has experienced rapid growth over the past three years, propelled by the booming new energy vehicle market; its compound annual growth rate (CAGR) in market size exceeds 25%, and the global market size surpassed USD 100 billion in 2024. Future trends will be dominated by high-nickel cathodes and solid-state battery technologies, driving surging demand for ultra-high-nickel precursors—high-nickel ternary materials are projected to achieve a penetration rate exceeding 40% by 2025. However, the industry is significantly affected by commodity price volatility (e.g., nickel, cobalt), exhibiting notable cyclical characteristics. GEM’s business is highly correlated with metal prices, classifying it as a cyclical stock. Company’s profit model and primary sources of profit: GEM’s profits primarily derive from new energy materials manufacturing and resource recycling operations. In 2024, revenue from new energy battery materials and raw materials reached RMB 25.762 billion, accounting for 77.6% of total revenue, with a gross margin of 17.73%. Specifically, ternary precursor revenue amounted to RMB 16.075 billion (48.42% of total revenue); nickel resources (MHP, nickel plates) generated RMB 5.848 billion (17.61%); and cobalt recycling contributed RMB 2.055 billion (6.19%). Revenue from waste resource comprehensive utilization totaled RMB 7.437 billion, with a gross margin of 6.84%. Company’s financial strategy: The company emphasizes scale expansion and R&D investment but maintains a relatively high debt ratio (61.93% as of H1 2024), with financial expenses eroding part of its profits (RMB 298 million in H1 2024, up 98.5% year-on-year). Through internationalization (e.g., Indonesia nickel projects), GEM seeks cost reduction—but capital expenditures remain substantial, resulting in volatile free cash flow. Operating cash flow net amount in 2024 reached RMB 3.055 billion, up 41.14% year-on-year, reflecting improved operational efficiency. Clarity of business model: GEM’s business model is clear, centered on a dual-track strategy of “urban mining + new energy materials manufacturing.” However, profitability remains vulnerable to metal price fluctuations and industry competition, yielding only moderate earnings resilience. Working capital and free cash flow analysis: The company must continuously invest working capital to expand capacity (e.g., Indonesia nickel project, precursor production expansion), thus aligning more closely with option b: “expanding business and profit capacity through continuous investment in new working capital.” Capital expenditures were large in 2024, yet free cash flow improved (operating cash flow net amount stood at RMB 3.055 billion in 2024). Rating: 7.5/10 (Clear business model, but profitability heavily impacted by cyclicality and requires sustained capital investment) II. Operational Stability Enterprise development stage and growth rate: GEM is in its growth stage. Its revenue CAGR over the past six years stands at 18.24%, while net profit CAGR is 6.76%. In 2024, revenue reached RMB 33.2 billion (up 8.75% year-on-year), and attributable net profit was RMB 1.02 billion (up 9.19% year-on-year). Although the industry’s CAGR exceeds 25%, GEM’s growth rate remains below the industry average—yet still reflects steady expansion. Profit stability: Net profit has fluctuated significantly over the past five years (RMB 735 million, RMB 412 million, RMB 923 million, RMB 1.295 billion, RMB 934 million, and RMB 1.02 billion for 2019–2024), illustrating pronounced cyclical behavior driven by metal price swings and industry competition.

GEM Recycling’s spin-off listing: Core business heavily reliant on government fund subsidies; revenue growth without corresponding profit growth after subsidy reductions.

From the data, in 2021, despite solid revenue growth, net profit declined. Should GEM Recycling continue relying on fund subsidies, its future profit margins may face further compression. High accounts receivable and persistent pressure on cash flow: It is undeniable that government fund subsidies have fueled the growth of waste home appliance dismantling enterprises. From 2019 to 2021, the Ministry of Finance was GEM Recycling’s largest customer. However, the company acknowledged that “the absolute amount of fund subsidy income is substantial and payment terms are lengthy, resulting in significant working capital pressure during the reporting period, alongside elevated financing costs.” From 2019 to 2021, GEM Recycling’s financial expenses amounted to RMB 40.561 million, RMB 37.9668 million, and RMB 34.0866 million respectively—ranking among its top expense items. This trend persists: although the company reports profits on paper, it fails to generate commensurate cash inflows. From 2019 to 2021, GEM Recycling’s accounts receivable balances stood at RMB 1.061 billion, RMB 1.156 billion, and RMB 1.404 billion, representing nearly 80% of current assets in each respective period. This indirectly led to substantial intercompany fund borrowings between GEM Recycling and GEM (its parent) and subsidiaries. Data shows that as of December 31, 2018, GEM Recycling owed GEM RMB 606.8247 million. In 2019, it repaid RMB 280.2677 million and borrowed RMB 213.9745 million, resulting in a net repayment of RMB 66.2932 million. In 2020, it repaid RMB 1.1715872 billion and borrowed RMB 631.0556 million. GEM Recycling is not alone in this situation: industry leaders in e-waste dismantling—including China Recycling Resources and Tsinghua Unisplendour—also face similarly high accounts receivable levels. Meanwhile, GEM Recycling’s gross margin stood at 23.07%, 26.11%, and 28.31% from 2019 to 2021, while its net profit margins were just 5.65%, 8.89%, and 6.51% respectively. Without fund subsidies, GEM Recycling would likely struggle to achieve profitability. Fundraising to replenish working capital and advance “non-subsidy” projects: It is reported that GEM Recycling plans to raise RMB 837 million via its IPO, allocating funds as follows: RMB 247 million to an annual dismantling project for 150,000 tons of “non-subsidized” waste electrical and electronic equipment (WEEE); RMB 290 million to an annual 100,000-ton smart manufacturing project for recycled modified plastics; RMB 150 million to establish an engineering research center for polymer material recycling; and RMB 150 million to supplement working capital. The fundraising purposes clearly indicate GEM Recycling’s strategic intent to reduce reliance on fund subsidies. Following the significant subsidy cuts effective April 1, 2021, the company stated it would offset declining profits by scaling up its waste plastic modification & regeneration and waste PCB comprehensive utilization businesses. Between 2019 and 2021, GEM Recycling’s maximum annual capacity for waste plastic modification and regeneration reached 70,000 tons, with a capacity utilization rate of 68.52% during that period. Yet in this IPO, GEM Recycling proposes raising funds to add a new 100,000-ton-per-year modified plastic regeneration capacity—a proposal that has drawn regulatory scrutiny.

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