CMSC: Stock Competition Operates as King, Cash Cow Style of Garbage Incineration Power Generation Industry Begins to Emerge

The CMSC released a research report stating that the peak construction period of projects has passed, and the waste incineration power generation industry has entered the stage of competition among existing projects, with a broad operating market space of 57 billion yuan. The restart of CCER and the expansion of green certificate trading are expected to offset the impact of the reduction in national subsidies. With the stability of operational capacity, capital expenditures in the sector are decreasing, operating net cash flow is increasing, free cash flow has turned positive, ROE is bottoming out and will soon rise, and leading companies with high operating efficiency are expected to achieve long-term stable growth in performance. The main points of view of CMSC are as follows: The peak construction period of projects has passed, the industry has entered the stage of competition among existing projects, and the operating market space is broad, with an estimated operating scale reaching 57 billion yuan by 2025. From 2012 to 2023, China's urban domestic waste incineration treatment capacity increased from 862,000 tons/day. In the first half of 2024, the number of waste incineration power generation projects opened for bidding in China decreased by 63% year-on-year, and the scale decreased by 77% year-on-year. Under the impact of the reduction in national subsidies, the peak construction period of projects has passed, and the industry has entered the stage of competition among existing projects. According to calculations, the operating market size of waste incineration in China from 2023 to 2025 is expected to reach 545/557/570 billion yuan, with a broad operating market space. The restart of CCER and the expansion of green certificate trading are expected to significantly offset the impact of the reduction in national subsidies. The carbon reduction effect of waste power generation is significant and is expected to benefit from the restart of CCER. In 2024, the price of CCER trading is at a high level, reaching 90 yuan/ton, and the continuous increase in CCER prices is expected to bring greater elasticity to the profits of waste incineration projects. Under neutral assumptions, the elasticity of CCER to project income reaches 8.3%, which can greatly offset the impact of the reduction in national subsidies. The stable operation of production capacity, leading companies are expected to increase market share. With the gradual release of waste incineration capacity under construction and planning, the capacity operation of waste incineration companies has stabilized after experiencing rapid growth and it is difficult to have significant increases in the short term. By the end of June 2024, the waste incineration power generation project capacity of EB ENVIRONMENT/Chongqing Sanfeng Environment Group Corp.,/Zhejiang Weiming Environment Protection/Grandblue Environment reached 13.8/6.1/3.6/3 million tons/day respectively, with year-on-year increases of approximately 5%/4%/7%/0% respectively. With a decrease in industry supply, leading companies are expected to increase market concentration through acquisitions and mergers to grab more market share. Capital expenditures are decreasing, operating net cash flow is increasing, and free cash flow is turning positive. After 2021, the number of industry construction projects decreased and industry capital expenditures are decreasing. From 2020 to 2023, the total capital expenditures of nine waste incineration companies decreased from 21.08 billion yuan to 12.37 billion yuan. With the continuous increase in operational capacity, the industry's operating net cash flow continues to increase. From 2020 to 2023, the operating net cash flow of nine companies increased from 8.42 billion yuan to 13.39 billion yuan. Currently, the waste incineration sector's free cash flow has turned positive. Capacity utilization rate is increasing, and emphasis is placed on improving power generation efficiency. After 2021, the industry entered a period of large-scale operation, and companies are paying more attention to operational efficiency. As of the end of June 2024, in terms of capacity utilization rate, Grandblue Environment (118%), CANVEST ENV (109%), EB ENVIRONMENT (103%), and Chongqing Sanfeng Environment Group Corp., (99%) are leading; in terms of power generation per ton, EB ENVIRONMENT (446 kWh/ton, all the same), Chongqing Sanfeng Environment Group Corp., (394), Grandblue Environment (376), and CANVEST ENV (371) are leading. Overall, we believe that EB ENVIRONMENT, Chongqing Sanfeng Environment Group Corp.,, and Grandblue Environment have some advantages in operational efficiency compared to other companies in the industry. Investment recommendations: (1) Grandblue Environment: With solid waste treatment as the core, synergistic development of water and energy, the acquisition of CANVEST ENV has been initiated, and it is on the verge of entering the top tier of the industry. (2) EB ENVIRONMENT: Entering the mature operation period, with high power generation per ton, actively expanding through mergers and acquisitions in the "incineration+" industry, continuously consolidating its leading position. (3) Chongqing Sanfeng Environment Group Corp.,: Deeply cultivating the Sichuan-Chongqing region, with projects in the Sichuan-Chongqing region accounting for 55% of the controlled production capacity, breaking through foreign technology monopolies, and signing a cooperation framework with Suez to assist in overseas expansion. (4) Zhejiang Weiming Environment Protection: Coordinated development of three major business segments, entering the new energy industry chain in 2022, and creating the second growth curve for the company. Risk warnings: intensified industry competition, subsidies recovery below expectations, profitability below expectations, etc.