Hanlan Environment plans to fully acquire and take control of Yuefeng Environmental behind the scenes: accounts receivable doubles, and the liability ratio rises to 70%

A landmark acquisition case that has lasted nearly two years and involved transaction value exceeding 10 billion yuan is about to reach its finale.

On June 30, Hanlan Environment (600323.SH) announced that its application to issue shares and pay cash to acquire assets, and raise supporting funds in a related-party transaction, has been accepted by the Shanghai Stock Exchange.

According to the announcement, the company plans to use a transaction consideration of 2.998 billion yuan to acquire 100% of the property interests in a high-quality development equity investment fund in Nanhai, Guangdong (abbreviated as “High-Quality Fund”), as well as the 7.22% shares of Yuefeng Environmental held by Zhendа Development Limited (abbreviated as “Zhendа Development”), while raising supporting funds of no more than 1.2 billion yuan.

If the transaction is completed smoothly, Hanlan Environment will achieve 100% control over Yuefeng Environmental, fully taking into its hands this waste incineration power-generation leader that had previously been listed on the Hong Kong stock market. Prior to this, with Yuefeng Environmental being consolidated, Hanlan Environment’s waste incineration power-generation scale had already jumped to the third position in the domestic industry. In 2025, both revenue and net profit achieved double-digit growth.

However, the other side of the coin is that high accounts receivable is a common challenge in the environmental protection industry. After this 10-billion-yuan-level acquisition is implemented, Hanlan Environment’s accounts receivable and its asset-liability ratio will rise at the same time. How to better leverage the synergy effects of the acquisition and address the practical challenges caused by increased debt pressure resulting from the acquisition and the increase in accounts receivable may still be the mandatory question facing the company.

A “two-step” strategic chessboard

Under the transaction plan, Hanlan Environment intends to purchase the remaining 43.48% equity interest in Hanlan Foshan by issuing shares and paying cash, through acquiring the property interests of the High-Quality Fund. It also intends to purchase the 7.22% equity interest in Yuefeng Environmental held by Zhendа Development by paying cash, thereby achieving full, wholly-owned control of Hanlan Foshan and Yuefeng Environmental.

Image source: Hanlan Environment announcement

Looking back, this deal is the final “puzzle piece” in Hanlan Environment’s acquisition of Yuefeng Environmental.

In July 2024, Hanlan Environment formally launched a major asset restructuring. It planned to privatize the Hong Kong-listed company Yuefeng Environmental through an arrangement under scheme in Hong Kong via Hanlan Hong Kong, with a total transaction price of HK$11.09 billion, equivalent to about RMB 10.3 billion.

A sum of over RMB 10 billion in cash is not a small figure. To push forward the transaction smoothly, Hanlan Environment jointly completed this deal with Guangdong Hengjian Investment Holding Co., Ltd. (abbreviated as “Guangdong Hengjian”), which is under the Guangdong Provincial State-owned Assets Supervision and Administration Commission, and with Guangdong Nanhai Holding Group Co., Ltd. (referred to as “Nanhai Holding”), the parent company of the company’s controlling shareholder.

Specifically, Hanlan Environment’s wholly-owned subsidiary Hanlan Solid Waste and the High-Quality Fund jointly established with Guangdong Hengjian and Nanhai Holding will increase capital in Hanlan Foshan by RMB 2.02 billion and RMB 2.0 billion, respectively. Meanwhile, Hanlan Foshan will apply to domestic banks for an M&A loan of no more than RMB 6.1 billion to pay the transaction consideration for this privatization deal.

After the transaction is completed, in June 2025, Yuefeng Environmental will be delisted from the Hong Kong Stock Exchange, becoming a controlling subsidiary of Hanlan Environment and consolidated into its financial statements. Yuefeng Environmental’s former controlling shareholder, Zhendа Development, will still hold 7.22% shares in Yuefeng Environmental.

At that time, Hanlan Environment said that the purpose of the High-Quality Fund’s investment was to support Guangdong’s enterprises in transformation and upgrading through equity investment. Within 12 months after the privatization is successfully completed, the High-Quality Fund will have the right to choose to transfer the equity interests to exit the investment.

A year later, the High-Quality Fund chose to exit the investment using a “share swap + cash transfer” approach.

According to the announcement, the entire transaction consideration corresponding to the 50% property interests in the High-Quality Fund held by Nanhai Holding will be paid in the form of shares, about RMB 1.08 billion; the 0.05% interests held by Hengjian Assets will be settled with cash consideration for clearance; the 49.95% interests held by the Advanced Manufacturing Fund will be paid using a mix of cash and shares— the cash portion is about RMB 863 million, and the share portion is about RMB 216 million.

Meanwhile, Hanlan Environment and its controlling subsidiary Hanlan Hong Kong plan to purchase the 7.22% equity interest in Yuefeng Environmental held by Zhendа Development by paying cash. The consideration amount paid by the listed company is RMB 438 million, and the consideration amount paid by Hanlan Hong Kong is RMB 400 million.

“This transaction is a key step to implement the development strategy of the listed company and carry out the company’s business layout,” Hanlan Environment said in the announcement. Through this transaction, the listed company will fully achieve wholly-owned control over Hanlan Foshan and Yuefeng Environmental, eliminating potential decision-making differences that minority shareholders’ rights and interests may bring.

A 20% value appreciation for the target; subsidiaries involved in more than RMB 100 million in pending lawsuits

As the core target of this transaction, Yuefeng Environmental’s principal business includes waste incineration power generation, smart city environmental sanitation, and related services. It is the largest waste incineration power-generation enterprise in Guangdong Province. Its waste incineration power-generation projects cover 12 provinces and cities including Guangdong, Shanghai, Sichuan, Shandong, and Jiangsu, and the designed municipal household waste daily treatment capacity is 52,540 tons.

According to the appraisal results using the income approach, as of the appraisal benchmark date December 31, 2025, Yuefeng Environmental’s carrying amount of owners’ equity attributable to the parent company was RMB 9.622 billion, and the appraised value was RMB 11.604 billion. The appraised appreciation was RMB 1.982 billion, with an appreciation rate of 20.59%.

Under a premium acquisition, Hanlan Environment and Nanhai Holding entered into a performance compensation agreement. Nanhai Holding has committed that if the transaction is delivered and completed in 2026, Yuefeng Environmental’s net profits from 2026 to 2028 will not be less than RMB 991 million, RMB 1.023 billion, and RMB 1.026 billion, respectively. If the transaction is delivered and completed in 2027, Yuefeng Environmental’s net profits from 2027 to 2029 will not be less than RMB 1.023 billion, RMB 1.026 billion, and RMB 1.096 billion, respectively.

If performance targets are not met, Nanhai Holding will be required to fulfill its performance compensation obligations. Compensation will be made first using the shares of the listed company obtained in this transaction; if there is a shortfall, cash compensation will be made. The total compensation cap will not exceed the transaction consideration that Nanhai Holding receives in this transaction.

Judging from Yuefeng Environmental’s current profitability, in 2024-2025, its operating revenue was RMB 3.926 billion and RMB 4.493 billion, respectively; and net profit attributable to the parent company was RMB 635 million and RMB 759 million, respectively. Against the backdrop of the waste incineration power-generation industry transforming from “incremental expansion” to “inventory optimization,” whether Yuefeng Environmental can successfully fulfill the performance commitments remains to be seen.

It is also worth noting that Yuefeng Environmental’s subsidiaries are involved in a pending lawsuit with an amount exceeding RMB 100 million.

The restructuring report shows that in April 2025, Xinyi Yuefeng received an “Administrative Decision Letter” issued by the Housing and Urban-Rural Development Bureau of Xinyi City, Guangdong Province. The bureau determined that during the period from 2020 to March 2024, without the consent of the Xinyi city government and the housing and urban-rural development bureau, Xinyi Yuefeng unlawfully received a total of 94,300 tons of waste incineration fly ash from outside Xinyi city and landfilled it at the project’s supporting fly ash landfill site, thereby obtaining revenue of RMB 108 million. According to a “Letter of Authorization” issued by the People’s Government of Xinyi City, the bureau ordered Xinyi Yuefeng to compensate RMB 108 million.

Xinyi Yuefeng was dissatisfied with the decision, arguing that its conduct was lawful and compliant and that the administrative decision lacked factual and legal basis. In August 2025, Xinyi Yuefeng filed a lawsuit with the Intermediate People’s Court of Maoming City, requesting that the “Administrative Decision Letter” issued by the People’s Government of Xinyi City and the Housing and Urban-Rural Development Bureau of Xinyi City be revoked in accordance with law, and that the two defendants be ordered to bear all litigation costs of this case. As of now, the court of first instance has held a hearing, and a ruling is still pending.

Behind record-high performance are rising accounts receivable and debt ratio at the same time

Behind an acquisition costing more than RMB 10 billion are practical challenges such as slower growth in the company’s core business. Hanlan Environment’s principal businesses include solid waste treatment, energy business, water supply business, and wastewater drainage business. Among them, the solid waste treatment business has the highest revenue share, mainly including waste incineration power generation, engineering and equipment, sanitation services, kitchen waste/food waste processing, and agricultural waste processing, among others.

Over the past decade or more, supported by policies such as electricity price subsidies, China’s waste incineration power-generation industry developed rapidly, forming a complete industrial chain and a mature business model. However, as the incineration capacity of large and medium-sized cities in China has approached saturation, combined with factors such as subsidy pullbacks, market growth has become relatively steady.

According to publicly available data from the Ministry of Housing and Urban-Rural Development’s “2024 Urban and Rural Construction Statistical Yearbook,” in 2024, among the 1,129 waste incineration plants in China’s cities and county towns, the annual incineration volume was 268 million tons, and the overall capacity utilization rate was about 63.22%. This means the industry has become relatively mature and has entered the stage of competition in terms of existing (stock) capacity.

Mapped to corporate financial data, in 2023-2024, due to factors such as the completion of in-hand engineering orders and the decline in the revenue scale of PPP engineering businesses, Hanlan Environment’s operating revenue declined for two consecutive years, falling 2.59% and 5.22% year-on-year, respectively.

With Yuefeng Environmental being consolidated into Hanlan Environment’s financial statements in June 2025, it will bring a substantial incremental contribution to the company’s business scale and current performance. The company’s waste incineration power-generation project scale reached 97,590 tons/day, increasing by 52,540 tons/day, ranking among the top three domestic industry players and first among A-share listed companies.

In terms of performance, in 2025, Hanlan Environment achieved revenue of RMB 13.937 billion, up 17.25% year-on-year; and net profit attributable to the parent company of RMB 1.973 billion, up 18.58% year-on-year. Among them, Yuefeng Environmental’s consolidation contributed RMB 2.721 billion to revenue and RMB 274 million to net profit attributable to the parent company, accounting for 19.52% and 13.89%, respectively. If this impact is excluded, Hanlan Environment’s revenue would have declined 5.63% year-on-year, and the growth rate of net profit attributable to the parent company would drop to 2.1%.

However, while this acquisition brings great benefits to Hanlan Environment, it also brings it some “troubles.”

Due to paying the acquisition consideration for Yuefeng Environmental, Hanlan Environment’s cash and cash equivalents decreased from RMB 4.258 billion at the end of 2024 to RMB 2.73 billion at the end of 2025.

Due to applying for an M&A loan of RMB 6.1 billion, combined with the impact of Yuefeng Environmental being consolidated, as of the end of 2025, the company’s asset-liability ratio increased by 8.87 percentage points to 70.15%. Non-current liabilities due within one year increased 96.66% year-on-year to RMB 4.439 billion. Long-term borrowings increased 139% year-on-year to RMB 23.822 billion.

At the same time, affected by additional interest expenses from the new M&A loan and the consolidation impact from Yuefeng Environmental, in 2025 Hanlan Environment’s finance costs reached RMB 794 million, up 59% year-on-year; management expenses also increased 22.57% year-on-year to RMB 890 million.

With accounts receivable issues that continuously trouble environmental protection enterprises, Hanlan Environment is also facing new challenges such as a surge in accounts receivable. By the end of 2025, the company’s accounts receivable reached RMB 8.337 billion, up 96.08% year-on-year, far exceeding the growth rate of revenue. Its proportion of current assets rose to 61.76%, and accounts receivable as a share of current-period revenue reached 59.82%, mainly due to Yuefeng Environmental being consolidated.

As the company acquires the remaining shares of Yuefeng Environmental using RMB 1.7 billion in cash and RMB 1.295 billion in shares as the transaction consideration, it may further push up Hanlan Environment’s debt ratio.

Image source: Hanlan Environment announcement

The restructuring report shows that, according to the “Pro Forma Review Report” issued by Huaxing Certified Public Accountants, after completing this transaction and without considering the impact of raising supporting funds, the company’s asset-liability ratio in 2025 will rise to 72.91%. The current ratio will drop from 0.93 to 0.83, and the quick ratio will drop from 0.91 to 0.81. This change is mainly because, after the company assumes the cash consideration payment obligation for this transaction, other payables increased.