Haitong: Environmental industry operations quality continues to improve. It is recommended to pay attention to garbage incineration and water management sectors.

Haitong20242024H1 Haitong's main points are as follows: 2024H1 environmental protection industry revenue increased by 1.53% year-on-year, operating cash flow ratio to net profit attributable to mothers increased by 8 percentage points. 24H1 environmental operating income increased by 1.53% year-on-year to 250.9 billion yuan, while net profit attributable to mothers decreased by 10% year-on-year to 20.2 billion yuan. The gross profit margin remained at around 28%, the middle median decrease in ROE was 0.35 percentage points to 3.5%. Capital expenditures increased by 5% year-on-year to 38.5 billion yuan; net cash flow from operating activities increased by 2% year-on-year to 13.1 billion yuan, with the ratio to net profit attributable to mothers increasing by 8 percentage points to 65%. Haitong believes that due to the macroeconomic recovery falling short of expectations and the downward trend of bulk commodity prices, the revenue and profit end of the environmental protection industry in the first half of 2024 were relatively under pressure, with a narrowing year-on-year growth rate of cash flow, but the increase in the ratio of net profit to mothers still indicates a continuous improvement in operating quality. Improvement of accounts receivable in the water treatment industry, focus on high-end substitute process in the membrane industry The water treatment industry has entered a mature stage, with a decrease in the proportion of project revenue and capital expenditures in 2024H1, but the rate of decline in project revenue has slowed down, and accounts receivable is still growing while payments have not yet improved. The current dividend yield is about 2%, and the TTM PE valuation is about 15 times. Long-term optimism remains for assets with stable cash flow and high dividend conditions. Companies to watch include Jiangxi Hongcheng Environment (600461.SH) and BJ ENT WATER (00371). In 2024H1, the membrane industry benefited from a decrease in raw materials, resulting in a recovery in gross profit margin and a significant increase in net profit attributable to mothers. Haitong believes that China's membrane industry is transitioning from a growth period to a mature period, gradually extending into the high-end membrane technology application field, potentially replacing imported materials and equipment. Sanitation: Industry continues on the path of marketization, greening and intelligent industry important trends The main listed companies in the sanitation industry saw a 5% year-on-year increase in revenue in 24H1 to 16.7 billion yuan, with a gross profit margin of 26% holding steady compared to 23H1, and a 9% year-on-year decrease in net profit attributable to mothers to 700 million yuan. The sanitation industry continues on the path of marketization, with a decrease in concentration, increased competition, and important trends in greening and intelligence. The annual new order total hit a historical high in 24H1, but accounts receivable and days for collecting payments continue to rise. The current TTM PE ratio for the sector is about 12 times, and given local financial pressures and competition from local environmental protection groups, the sustainability of valuations remains to be verified as long as the market structure does not improve significantly. Equipment upgrades boost demand, high-end energy-saving equipment expected to benefit Haitong believes that as key high-energy consumption industries accelerate energy conservation and carbon reduction and both domestic and foreign carbon markets continue to develop, the energy-saving equipment industry is expected to continue to benefit. Companies to watch include Shuangliang Eco-Energy Systems, Shanghai Rychen Technologies, Nanfang Zhongjin Environment, and Jingjin Equipment Inc. With the rise of AI artificial intelligence and the expected recovery of downstream terminal market demand, the semiconductor industry's prosperity is expected to improve, with semiconductor waste gas treatment systems and process related equipment orders expected to continue to be released. Companies to watch include MayAir Technology (688376.SH) and Qingdao Guolin Technology Group (300786.SZ). Resource utilization: Net profit significantly increased, policy measures expected to boost industry demand The main listed companies in the resource utilization industry saw a 18% year-on-year increase in revenue in 24H1 to 76.3 billion yuan, with a gross profit margin of 15.6% remaining basically the same as in the same period in 2023, and net profit attributable to mothers increasing by 51% year-on-year to 2.4 billion yuan. Within the sector, performance was polarized, with traditional resource companies under pressure due to fluctuations in commodity prices, while companies in the extended new materials field began a second growth curve, driving overall industry profit improvement. Haitong believes that on one hand, benefiting from the "Promotion of Large-scale Equipment Renewal and Consumer Goods Replacement Action Plan", will drive demand for resource recycling, with scrapped cars expected to benefit from the potential for a billion-dollar market. On the other hand, the Federal Reserve's interest rate cuts are expected to boost commodity prices and help improve the recycling resources industry. Companies to watch include Jiangsu Huahong Technology (002645.SZ), Qingdao Huicheng Environmental Technology Group (300779.SZ), Hangzhou Dadi Haiyang Environmental Protection (301068.SZ), Miracle Automation Engineering (002009.SZ), Wangneng Environment (002034.SZ), and Dongjiang Environmental (002672.SZ). Solid waste: Continuous improvement in operating quality in 24H1, continuous decline in capital expenditures, dividend prospects In 2024H1, the main listed companies in the solid waste industry saw a 0.74% year-on-year increase in revenue to 43.1 billion yuan, with the proportion of project income decreasing by 6.5% year-on-year to 22%, and net profit attributable to mothers increasing by 5% year-on-year to 7.8 billion yuan. Net cash flow from operating activities increased by 44% year-on-year to...76 billion yuan, capital expenditures decreased by 40% year-on-year to 62 billion yuan. Haitong believes that the decrease in capital expenditures for waste incineration, steady improvement in operating quality, continuous improvement in cash flow of the sector, and conditions for increasing dividends are in place. The dividend ratio for the sector in 2024H1 is 25%, an increase of 5 percentage points year-on-year, with a TTM dividend yield of approximately 2.84%. The current TTM PE valuation of the sector is only 10 times, focusing on investment opportunities for valuation repair.Investment advice: In order to promote the transformation from energy consumption control to carbon emissions control, it is expected that multi-sector green low-carbon demonstration projects will be fully implemented, combined with the accelerated construction of the carbon market, which will inject vitality into the environmental protection industry. In 2024, it is recommended to focus on two main themes: High dividends: Focus on the waste incineration and water sector. With capital expenditure decreasing, stable operational cash flow can support dividend increases, thereby enhancing the current undervaluation; related sub-sectors of economic recovery and carbon market construction, focusing on improving resource recycling efficiency, reducing costs, reducing carbon emissions, it is recommended to focus on: semiconductor accessories, treatment of non-ferrous waste acid, carbon monitoring, environmental sanitation services, and metal resource utilization benefiting from industrial recovery. Risk warning: Industry recovery does not meet expectations, policy implementation does not meet expectations, demand release does not meet expectations.