Guosheng Securities: Environmental Protection Industry Transformation and Upgrading, Grasping the New Opportunities of Water Management and Solid Waste Resource Utilization.

Guosheng Securities released a research report stating that the overall operating income of the environmental protection industry in the first half of 2024 was 167.04 billion yuan, with a year-on-year growth rate of 2.6%; the net profit attributable to the parent company was 12.3 billion yuan, with a year-on-year growth rate of -13.2%, mainly due to fluctuations in product and raw material prices leading to a narrowing of profits. The overall demand from the industry's upstream and downstream sectors maintained a stable growth trend, but due to intense market competition, profit margins have been squeezed. The industry is undergoing transformation and upgrades, seizing new opportunities in water services and solid waste recycling. Currently, the environmental protection sector is highly differentiated, and it is optimistic about companies with outstanding technological capabilities, excellent cash flow, and high dividends from undervalued quality state-owned enterprises. Guosheng Securities' main points are as follows: Pressure on performance in the first half of 2024, with a slight decline in overall profitability According to the Guosheng Environmental Protection Portfolio, the overall operating income of the environmental protection industry in the first half of 2024 was 167.04 billion yuan, with a year-on-year growth rate of 2.6%; the net profit attributable to the parent company was 12.3 billion yuan, with a year-on-year growth rate of -13.2%, mainly due to fluctuations in product and raw material prices leading to a narrowing of profits. Revenue in the second quarter of 2024 continued to grow by 0.5% year-on-year, while net profit attributable to the parent company declined by 31.0% year-on-year. The overall demand from the industry's upstream and downstream sectors maintained a stable growth trend, but profit margins were squeezed due to intense market competition. Overall decline in industry profitability, with proper cost control The overall gross profit margin of the environmental protection sector in the first half of 2024 was 24.5%, a decrease of 0.3 percentage points from the same period last year; the overall net profit margin was 8.1%, a decrease of 1.4 percentage points from the same period last year. This may be related to a decrease in investment return rate year-on-year by 0.6 percentage points, an increase in operating cost ratio year-on-year by 0.3 percentage points, and an increase in asset impairment rate year-on-year by 0.1 percentage points. In the first half of 2024, the industry's overall period expense ratio was 14.4%, unchanged from the same period last year, indicating strong cost control capabilities. Significant growth in operating cash flow net amount for the industry in the first half of 2024, with an increase in investment cash outflow The operating cash flow net amount for the environmental protection industry in the first half of 2024 was 77.3 billion yuan, an increase of 34.9% year-on-year, mainly due to a decrease in purchases and an increase in receipts. Among them, the solid waste management sector had 68.1 billion yuan (an increase of 104.3% year-on-year), maintaining ample operating cash flow; the atmospheric governance sector had 1.7 billion yuan (an increase of 160.0% year-on-year), the water treatment sector had 1.5 billion yuan (an increase of 156.0% year-on-year), and the operating cash flow turned positive; the water service operation sector had 33.6 billion yuan (a decrease of 30.2% year-on-year), with a decline in cash flow. Financing cash flow was 109.1 billion yuan (an increase of 44.3% year-on-year), and net outflow of investment cash flow was 297.9 billion yuan (an increase of 25.3% year-on-year). As environmental protection policies continue to be introduced, industry demand is further released, leading to an increase in external investments. Sub-sectors performance differentiation Solid waste management and water service operations are developing well, while energy conservation lags behind. In terms of revenue growth, the performance of solid waste management/atmospheric governance/water service operation/water treatment/monitoring/energy conservation in the first half of 2024 showed year-on-year growth rates of 13.9%/3.6%/3.5%/-1.4%/-2.4%/-32.1%; in terms of net profit attributable to the parent company, the performance of monitoring/solid waste management/water service operation/atmospheric governance/water treatment/energy conservation in the first half of 2024 showed year-on-year growth rates of 45.0%/15.7%/-2.4%/-15.7%/-42.0%/-388.5%. The solid waste sector is benefiting from the stable operation of waste incineration and power generation projects, gradually strengthening profitability; hazardous waste resource utilization is reducing costs and increasing efficiency, enhancing industry prosperity. Water service operations benefit from increased operational efficiency and stable revenue growth. Atmospheric governance benefits from continued policy tightening, maintaining stable revenue. Energy conservation and water treatment are constrained by intensified market competition, narrowing profit margins, and facing pressure in the industry's development stage. Industry transformation and upgrading, seizing new opportunities in water services and solid waste resource utilization Currently, the environmental protection sector is highly differentiated, and it is optimistic about companies with outstanding technological capabilities, excellent cash flow, and high dividends from undervalued quality state-owned enterprises. Key recommendations include Beijing GeoEnviron Engineering & Technology, Inc.(603588.SH), which benefits from carbon neutrality and expanding demand in the resource utilization field; and Qingdao Huicheng Environmental Technology Group(300779.SZ), which won major hazardous waste projects and is entering the waste plastic recycling market. Undervalued, high dividend, excellently managed, and continuously growing environmental state-owned enterprises Jiangxi Hongcheng Environment(600461.SH) and Grandblue Environment(600323.SH). Risk warning: Environmental policies and inspection efforts are lower than expected, project construction progress is slower than expected, and increased industry competition poses risks.