Yuanli has been engaged in wood-based activated carbon for more than two decades and has formed a business pattern driven by the dual driver of wood-based activated carbon and silicides. Yuanli has been long building a presence in wood-based activated carbon business: Firstly, it built the revenue base on the back of the rigid demand in traditional fields, such as food & beverage. Secondly, Yuanli gradually ventured into the environmental sector dominated by coal-based activated carbon and substituted coal-based activated carbon with wood-based activated carbon meanwhile benefiting from the high growth in the green activated carbon sector. Thirdly, Yuanli has successfully forayed into the market of high-end activated carbon by gaining a foothold in supercapacitor carbon, etc., and is likely to continue to be a beneficiary of import substitution. The Company's sodium silicate business mainly supplies its subsidiaries for the production of silica and silica gel and has recorded good profitability.

We are optimistic that Yuanli will continue to reduce costs and enhance efficiency via advantages in production size and green recycling mode production to strengthen its leading position, and achieve growth in both revenue and net profit. We estimate its 2022E/23E/24E EPS at Rmb0.70/0.89/1.08. Considering the absolute valuation method and the relative valuation method, we arrive at a reasonable valuation of Rmb8.6bn for the Company, corresponding to a target price of Rmb28 on 31x 2023E PE. We initiate coverage with a “BUY” rating.

A wood-based activated carbon leader driven by the dual driver of activated carbon and silicides.

Yuanli has two major business segments, namely, activated carbon and silicides. Among them, wood-based activated carbon is recognized by the Ministry of Industry and Information Technology (MIIT) as a "niche champion product in manufacturing".

Activated carbon: Yuanli's wood-based activated carbon production capacity has exceeded 110ktpa, which is mainly used in food & beverage, pharmaceuticals and chemicals, etc. The Company plans to ramp up the production capacity of green wood-based (bamboo-based) activated carbon by 100ktpa, which is likely to be gradually put into production.

Yuanli’s current production capacity of supercapacitor carbon has reached 300tpa, and it will continue to increase its production lines.

Silicide: Yuanli’s annual production capacity of sodium silicate has reached 300ktpa, which is partly supplied to the Company's equity subsidiary EWS for the production of silica. Its wholly-owned subsidiary Sanyuan Cycle has silica production capacity of 25ktpa. Yuanli’s operating revenue and attributable net profit (ANP) posted a CAGR of 17.2%/32.7%, respectively, over 2017-2021.

Traditional areas that used activated carbon record stable growth, the growth headroom for environmental activated carbon is vast, and the

prospect of the import substitution of supercapacitor carbon is clear.

Activated carbon can be mainly divided into two groups: wood-based and coal-based. Wood-based activated carbon can be used in relatively high value-added areas, such as food & beverage, pharmaceuticals and chemicals, while coal-based activated carbon dominates in physical absorption.

According to Agileintel Research’s estimates, the global market size of activated carbon is likely to reach US$10.1bn in 2025 at a 2021-2025 CAGR of 9.3%. The high-end activated carbon market is currently dominated by overseas companies, and domestic companies have been busy realizing import substitution.

1) Activated carbon in traditional fields: China's traditional fields, such as food & beverage, pharmaceuticals and chemicals, recorded stable growth, which imposes rigid demand for wood-based activated carbon.

Yuanli boasts edges in brand strength and its market share of wood-based activated carbon has exceeded 30%. Its will likely achieve the planned capacity expansion of 55ktpa for wood-based activated carbon used in traditional areas, which will further consolidate its revenue base.

2) Activated carbon in environmental protection: China's treatment of volatile organic compounds (VOCs), waste incineration treatment and sewage treatment are likely to maintain a growth rate of over 20%, driving the environmental activated carbon market to maintain high growth.

Coal-based activated carbon currently dominates the environmental protection field, but its rising costs have led to a decline in cost performance. Yuanli will gradually put into production 80kt of wood-based (bamboo-based) activated carbon for environmental protection before 2026. Wood-based activated carbon boasts excellent performance and the cost per tonne is already significantly lower than that of the coal-based one, which is likely to benefit from the green sector boom and the substitution for stock coal-based activated carbon.

3) Supercapacitor carbon: According to the estimates of Handbook of Nanocomposite Supercapacitor Materials published by Springer International Publishing, global supercapacitor market size is likely to post a 2021-2025 CAGR of 30%, while the costs of supercapacitor carbon account for more than 20%. China is the largest supercapacitor carbon market in the world, and the demand is likely to exceed 13kt in 2025 based on the estimates of chyxx.com. However, currently the supercapacitor carbon market is dominated by foreign companies, such as Kuraray, whose market share has exceeded 80%. Yuanli is the first domestic manufacturer to achieve the bulk supply of supercapacitor carbon. Its supercapacitor carbon production has reached 300tpa and will continue to expand going forward.

We expect Yuanli to create a new growth point amid import substitution.

Green tires are developing rapidly and Yuanli has been deeply involved in the highly dispersible silica value chain.

According to China Rubber Industry Yearbook 2021, with the rapid development of green tires, silicone rubber and other industries, the apparent consumption of precipitated silica (silica) in China recorded a gradual growth trend, posting a CAGR of 10.6% over 2015-2019, and we expect the domestic silica market size to exceed Rmb10bn in 2023. With the tightening regulations in the environmental protection market, the market concentration of silica industry in China will gradually increase, and the share of production capacity above 50ktpa expanded from 38.0% in 2011 to 71.12% in 2020. Yuanli has been deeply involved in the highly dispersible silica value chain, with an

annual sodium silicate production capacity of 300ktpa, and its equity subsidiary EWS has an annual silica production capacity of 100ktpa, which ranks among the top in the industry, and it is one of the few suppliers in the domestic silica industry that have obtained tire certification. In addition, Yuanli acquired Sanyuan Cycle in 2021 with incremental silicone rubber capacity of 25ktpa, which broadens the silicon value chain and enables the Company to achieve growth in both revenue and net profit through the double recycling between activated carbon and silicides going forward.

How to stand out: Multiple advantages consolidate the Company's leading position in activated carbon.

Yuanli has significant advantages in production size, with wood-based activated carbon capacity exceeding 110ktpa. It has become the largest and strongest wood-based activated carbon enterprise in China, and has continued to expand its production capacity through two fund raising projects via IPO proceeds to strengthen its leading position. Through the circular development of the four industries of bamboo, carbon, silicon and energy, the Company continues to reduce costs and enhance efficiency, and has been actively cooperating with Yihai Kerry to develop a green circular economy, which is conducive to continuously strengthening its secular competitiveness.

Yuanli has outstanding innovation ability and an extensive product portfolio.

With the establishment of Nanping Yuanli Activated Carbon R&D Center, we expect its R&D capability to be further enhanced to maintain its leading position and lend support to gaining a preemptive advantage in the high-end activated carbon market.

Potential risks: Risks in macroeconomic activities; intensified market competition; risks during the implementation of the fund-raising projects; volatility of raw material prices; fluctuations in exchange rates.

Investment recommendation: Yuanli has been engaged in wood-based activated carbon for more than two decades and has formed a business pattern driven by the dual driver of wood-based activated carbon and silicides. Yuanli has been long building a presence in wood-based activated carbon business: Firstly, it built the revenue base on the back of the rigid demand in traditional fields, such as food & beverage. Secondly, Yuanli gradually ventured into the environmental sector dominated by coal-based activated carbon and substituted coal-based activated carbon with wood-based activated carbon meanwhile benefiting from the high growth in the green activated carbon sector. Thirdly, Yuanli has successfully forayed into the market of high-end activated carbon by gaining a foothold in supercapacitor carbon, etc., and is likely to continue to be a beneficiary of import substitution. The Company's sodium silicate business mainly supplies its subsidiaries for the production of silica and silica gel and has recorded good profitability. We are optimistic that Yuanli will continue to reduce costs and enhance efficiency via advantages in production size and green recycling mode production to strengthen its leading position, and achieve growth in both revenue and net profit. We estimate its 2022E/23E/24E EPS at Rmb0.70/0.89/1.08. By using the absolute valuation method, we arrive at a reasonable valuation of Rmb9.4bn. By using the relative valuation method, we take the average comps valuation of 31x 2023E PE for Xinri Hengli Steel Wire Rope (600165.SH) and Silicon Material (301059.SZ) based on Wind consensus estimates as a reference. As a niche leader, Yuanli has been benefiting from the high growth in environmental activated carbon, as

well as import substitution of coal-based activated carbon. Combined with its successful venturing into the high-end activated carbon market, we assign 31x 2023E PE to derive a target market cap of Rmb8.6bn. Considering the absolute valuation method and the relative valuation method, we arrive at a reasonable valuation of Rmb8.6bn for the Company, corresponding to a target price of Rmb28 on 31x 2023E PE. We initiate coverage with a “BUY” rating.