Soochow: Waste incineration sector boosts dividends and ROE logic continues to materialize, focusing on recommending dividend value and overseas growth.

Soochow released a research report stating that the acceleration of national subsidies recovery will further strengthen the cash flow value of the sector. The renewable energy subsidy fund is expected to achieve a balance between income and expenditure around 2025, and thereafter, the accumulated arrears are expected to be gradually cleared with the hope of normalization of national subsidy recovery. The logic of increasing dividends and ROE in the waste incineration sector continues to be realized, while the acceleration of national subsidy recovery strengthens the cash flow value and the potential for new growth overseas. Dividend value and overseas growth are key recommendations. Soochow's main points are as follows: Focus on the logic behind the acceleration of national subsidies, the dividend value of waste incineration sector stems from the dual drive of capital spending reduction and improvement in operating cash flow. Since 2023, the improvement in free cash flow and dividend capacity of the waste incineration sector has been mainly driven by the reduction in capital expenditure. The bank's previous report quantified the potential for sector dividends from the perspective of capital spending reduction. When the sector's capital spending is reduced to a maintenance level (1.0%/1.5%/2% of total assets), the corresponding dividend potential for the year 2024 is 125%, 114%, and 102%. The national subsidy recovery has significantly accelerated since 2025Q3. What is more important now is that the bank calculates that the renewable energy subsidy fund may achieve a balance between income and expenditure around 2025, and thereafter, as green energy subsidies expire, income will exceed expenditure. This will allow for the gradual clearance of accumulated arrears while ensuring the timely payment of national subsidies. Therefore, the normalization of national subsidy recovery is expected to improve, supporting the increase in the net operating cash flow of the sector and strengthening the cash flow value. The average account period of national subsidies for waste incineration companies remains stable, with a significant acceleration in national subsidy recoveries in 25Q3. 1) Current situation of national subsidies arrears: The increase in arrears has slowed down, with account periods remaining around 2 years. Taking the national waste incineration companies Dynagreen Environmental Protection Group and Grandblue Environment as examples, the growth rate of national subsidies arrears in 2024 has slowed down, and theoretically, the account period of national subsidies remains around 2 years. 2) Marginal changes in national subsidies: A significant acceleration in repayments in 25Q3 has improved cash flow and reduced credit impairments. EB ENVIRONMENT received biomass national subsidy repayments of 2.064 billion RMB from July to August 2025, surpassing the 2024 level. Hanlan received national subsidy repayments of 245 million RMB in 25Q1-3, Junxin received 81 million RMB, and Sanfeng, Wanneng, and Greendong also saw significant acceleration in national subsidy repayments. In 25Q3, the single quarter net operating cash flow of the waste incineration sector was 633 million RMB, a year-on-year increase of 59% and a quarter-on-quarter increase of 52%. In 25Q3, the waste incineration sector provisioned for credit impairments of 41 million RMB, a year-on-year decrease of 44%, a significant reversal from the year-on-year increase of 41% in 25Q1 and 16% in 25Q2. Sanfeng, Shengyuan, and Greendong recorded credit impairment reversals in 25Q3. 3) Repayment rate of national subsidies: The median repayment rate of national subsidies has significantly increased. The bank's calculation shows that the average repayment rate of current national subsidies for the sector in 25Q1-3 is approximately 40% to 199%, with a mean of around 89%, significantly higher than the 39% average in 2024. The renewable energy subsidy fund is expected to achieve a balance between income and expenditure, with the gradual clearance of accumulated arrears. Income from the renewable energy development fund has been increasing year by year, while expenditure has reached its limit. 1) From the income side, the user-side renewable energy electricity price surcharge has remained unchanged at 0.019 RMB per kilowatt-hour since 2016, and with the steady increase in overall electricity consumption, the fund's income has grown in scale. 2) From the expenditure side, as new energy installations accelerate and benchmark electricity prices are gradually reduced to achieve parity by 2021, the annual expenditure of the fund has reached its limit. The bank expects that around 2025, the renewable energy development fund will achieve a balance between income and expenditure for the year, with accumulated historical arrears reaching a peak of 435.5 billion RMB. As green energy project subsidies expire and gradually phase out, expenditure pressure will decrease year by year, and income will exceed expenditure, leading to the gradual clearance of accumulated national subsidy arrears. Considering the fund's surplus for paying off outstanding subsidy arrears, the bank predicts that historical national subsidy arrears will be naturally resolved around 2036. Dividend potential calculation based on capital spending reduction and acceleration of national subsidy recovery. Building on the previous calculation of dividend potential under stable capital spending, the bank considers the accelerated rate of national subsidy repayments to calculate the upward potential for sector dividend payouts. The bank assumes 1) that when the waste incineration sector is in stable operation, the capital value will decrease to a maintenance level (assuming maintenance capital spending accounts for 1.5% of total assets), and 2) the national subsidy repayment rate for waste incineration increases from 40% to 100%. In this scenario, the dividend potential for the waste incineration sector will increase from 114% to 141%, further enhancing the dividend value. Risk warning: Risk of national subsidy delays/default, lower-than-expected waste disposal fee payments, increase in capital spending, etc.