GF SEC: Leading solid waste and water treatment companies can still maintain a 10% compound growth rate + 3% average dividend yield level.

GF SEC released a research report stating that the profitability, cash flow levels, and debt structure of the solid waste + water sector are not inferior to traditional dividend assets, and the valuation level is even lower. Looking ahead for the next 3-5 years, the "investment cash flow" of the solid waste + water sector is expected to significantly shrink, driving FCFF towards improvement. The volume is related to basic needs and has stable growth potential, while prices are expected to increase in the current favorable pricing environment. Leading solid waste and water companies can maintain a 10% compound growth rate + 3% average dividend yield level, along with a PE near 10 in 2024, making them stable assets with predictable returns. Molecular end E: Solid waste and water assets are public assets for urban use, linked to basic needs, and are more stable. Unlike other dividend assets that may be affected by macroeconomic factors, industrial development, and resource prices, solid waste and water assets are more closely related to the basic needs of city residents. The compound growth rates of national waste disposal, water supply, and sewage treatment volume from 2011 to 2022 are 4-6%. Considering the level of urbanization in China and the potential for increased per capita waste generation, the demand for solid waste and water assets in urban public utilities is expected to grow steadily in the long term. Denominator end R: The solid waste competitive landscape is stable, CAPEX is decreasing, FCFF is improving, and dividends are increasing year by year; water dividends remain at a high level. CAPEX: The compound reduction in capital expenditure in the solid waste sector from 2020 to 2023 exceeds 20%, and current solid waste companies have less than 10% of their capacity under construction, with almost no new investment. FCFF: In 2023, the solid waste sector achieved positive free cash flow for the first time. Leverage ratio: The solid waste sector has decreased by 3 percentage points in the past three years. Dividend rate: The leading solid waste companies have continuously increased for three years, with an average of 38% in 2023, and is expected to continue to increase with the improvement in cash flow; the water sector's dividend rate remains above 50%. The interim report further validates the above trends: the stability of the solid waste + water sector is prominent, capital expenditures are shrinking, and price mechanisms are expected to be improved. Waste incineration, water utilities, and other essential assets for basic needs have demonstrated strong resistance to economic cycles, with non-net profit attributable to shareholders in 24H1 increasing by 12% for waste incineration and 6% for water utilities. In terms of cash flow, the industry is gradually entering the late stage of capital expenditure, with the turning point for the solid waste sector already reached, and the simple free cash flow in 24H1 remaining positive. In addition to many cities such as Shanghai, Guangzhou, Changsha, and Nanjing initiating adjustments to tap water prices with increases ranging from 13% to 36%, policy initiatives are also actively promoting reform in sewage and waste treatment fees, indicating that price mechanisms are being improved and user fees are becoming the trend. Additionally, EB ENVIRONMENT, Dynagreen Environmental Protection Group, Wangneng Environment have initiated midterm dividends for the first time, with dividend ratios reaching 35%, 46%, and 24% respectively. Recommended targets to watch: Grandblue Environment (600323.SH), Chongqing Sanfeng Environment Group Corp., (601827.SH), EB ENVIRONMENT (00257), Jiangxi Hongcheng Environment (600461.SH), etc. Risk warning: Risks of policy changes, lower dividend expectations, declining asset return rates for new projects, etc.