GF Securities: Reiterates the undervalued potential of the solid waste sector. Policies and industry resonance promote the rise of the "AI Waste" track.

GF SEC has released a research report, stating that in the context of a significant drop in stock price after the annual report, the overall valuation of the solid waste sector is low. With the growth potential brought by slag, green energy vehicles, synergy between electricity and calculation, and overseas expansion, along with the stable growth characteristics of performance, cash flow, and dividends, it is reiterated that the investment cost-effectiveness of the sector remains high. Waste incineration, as a "green basic load power source," has stable power supply and proximity to the load advantage, highly matching the demand for Artificial Intelligence Data Centers (AIDC). Policies include AI servers in mandatory control, estimating the size of the AI server recycling industry to reach 500 billion yuan by the end of the 15th Five-Year Plan. Policies and industrial resonance will promote the rise of the "AI waste" track. The main points of GF SEC are as follows: Solid waste performance/dividends/cash flow in 2025 are on the rise, and the undervalued characteristics under oversold conditions need to be emphasized. As of last Friday (April 3, 2026), 30 environmental protection companies have released their 2025 annual reports, with 20 companies achieving positive performance growth, 6 companies seeing a slight decline in performance, 1 company turning losses into profits, and 3 companies showing losses in performance. Seven waste incineration companies achieved a net profit attributable to shareholders of 9.819 billion yuan (up 11.2% year-on-year); dividends totaled 4.282 billion yuan (up 8.4% year-on-year), with EB ENVIRONMENT, Grandtop Yongxing Group, and Hunan Junxin Environmental Protection having dividend yields TTM of 5.1%, 4.4%, and 4.2%, respectively. Six waste incineration companies with disclosed cash flows achieved a net operating cash flow of 11.209 billion yuan (up 12.7% year-on-year), a net cash flow from investing activities of -5.502 billion yuan (up 9.9% year-on-year), and a free cash flow of 5.707 billion yuan (up 0.764 billion yuan year-on-year), showing continuous improvement in free cash flow. In the background of a significant drop in stock prices after the annual report, the overall current Hong Kong Stock Exchange 2026 PE ratio of the solid waste sector is only 8-9 times, and the A-share 2026 PE ratio is only 10-17 times. Combined with the growth potential brought by slag, green energy vehicles, synergy between electricity and calculation, and overseas expansion, and the stable growth characteristics of performance, cash flow, and dividends, it is reiterated that the investment cost-effectiveness of the sector remains high. The opportunity of accelerated growth of solid waste and revaluation of valuation - slag, green energy vehicles, synergy between electricity and calculation, and overseas expansion. Slag (including copper, gold, silver, etc.) is revalued in the context of rising metal prices; steam heating benefits from stringent carbon constraints and increasing industrial demand, with low cost and high elasticity. The bank estimates that under the condition of "slag price increase of 100 yuan/ton and all exports, steam supply ratio of 10%, and steam price of 200 yuan/ton," based on the expected net profit attributable to shareholders in 2025, the performance elasticity of 12 listed waste incineration companies can reach an average of 44%, and will become a sustained source of performance for each company in the future. At the same time, waste incineration, as a "green basic load power source," has stable power supply and proximity to the load advantage, highly matching AIDC demand. Policy and industrial resonance promote the rise of the "AI waste" track. In March 2026, the new version of the "Technical Specification for Pollution Control in the Treatment of Waste Electrical and Electronic Products" was implemented, including AI servers in mandatory control. In addition, with the background of the AI industry scale breaking through 10 trillion yuan by the end of the 15th Five-Year Plan and the growth of electronic waste by nearly a thousand times if not recycled within ten years, the formalization of AI waste recycling is imperative. Based on a 3-5 year life cycle projection, AI servers purchased in 2024 will be replaced in 2027-2028. These two years alone can reach an annual market of 60-76 billion yuan, plus traditional electronic value, and the industrial scale by the end of the 15th Five-Year Plan is expected to reach 500 billion yuan. This track has the characteristics of high residual value (e.g., H100 residual rate of 80-90%), high concentration, high processing difficulty, and high compliance threshold. Leading companies with the qualification of disassembling electrical and electronic equipment will benefit first, and potential targets for layout in the full chain of server recycling include Hangzhou Dadi Haiyang Environmental Protection, Hwaxin Environmental, China Resources And Environment. Risk warning Low expectations for orders and new business layouts, policy change risks, and low expectations for dividends.