GF SEC: Environmental protection industry performance steadily recovering, tapping new opportunities in computing power and resource utilization.

GF SEC released a research report stating that in 2026H1, the environmental protection sector achieved operating revenue of RMB 189.9 billion (+10.7% YoY), net profit attributable to parent of RMB 16.8 billion (+7.1% YoY), and non-recurring net profit attributable to parent of RMB 15.7 billion (+13.4% YoY). Sector profitability maintained positive growth, and institutional allocation is near historic lows. Solid waste and water affairs stand out for their low valuations, high dividends, and cash flow value, while computing-power-electricity coordination, slag resource utilization, and green steam open up incremental space. AI transformation and metal resource utilization have become the sector's most distinctive growth themes, with attention on computing power leasing, AI recycling, and rare and precious metal purification. The bank recommends focusing on high-growth directions in the industry as well as low-valuation operating assets. GF SEC's main views are as follows: 2026H1 sector performance continued to recover, cash flow improved significantly, and institutional allocation is near historic lows In 2026H1, the environmental protection sector achieved operating revenue of RMB 189.9 billion (+10.7% YoY), net profit attributable to parent of RMB 16.8 billion (+7.1% YoY), and non-recurring net profit attributable to parent of RMB 15.7 billion (+13.4% YoY), of which 2026Q2 non-recurring net profit attributable to parent grew 4.1% YoY, with sector profitability maintaining positive growth. By structure, solid waste and water affairs companies recorded non-recurring net profit attributable to parent of RMB 10.0 billion (-0.7% YoY), with operating assets remaining resilient; other companies recorded non-recurring net profit attributable to parent of RMB 5.8 billion (+50.1% YoY), with growth mainly from the hazardous waste resource utilization segment, whose 2026H1 non-recurring net profit attributable to parent reached RMB 3.17 billion (+186.0% YoY). Cash flow improvement was even more prominent, with the sector's net operating cash flow growing 32.3% YoY to RMB 16.2 billion, net investing cash outflow narrowing 39.6% YoY to RMB 19.7 billion, and simplified free cash flow improving from -RMB 20.4 billion in the same period last year to -RMB 3.5 billion. Meanwhile, at the end of 2026Q2, fund allocation to environmental protection stocks was only 0.12%, close to the lowest level since 2013. Solid waste and water affairs stand out for low valuations, high dividends, and cash flow value, while computing-power-electricity coordination, slag resource utilization, and green steam open up incremental space In 2026H1, the waste incineration and water affairs segments achieved operating revenue of RMB 27.9 billion/35.2 billion (+5.7%/+4.4% YoY) and non-recurring net profit attributable to parent of RMB 5.5 billion/4.5 billion (-0.3%/-1.2% YoY), respectively, with core operating businesses remaining stable. As the investment peak passes, the waste incineration segment's simplified free cash flow turned from -RMB 5.2 billion to RMB 4.5 billion, while the water affairs segment improved from -RMB 5.3 billion to -RMB 1.9 billion, with water affairs already achieving approximately RMB 2.7 billion in positive free cash flow in 2026Q2 alone. The logic of dividend increases continues to materialize. From 2021 to 2025, the average dividend payout ratio of 27 typical high-dividend solid waste and water affairs sample stocks rose from 29.5% to 45.0%, and the dividend yield rose from 3.17% to 4.13%. According to Wind consensus estimates, mainstream companies' 2026 PE is about 7-15x. In terms of growth, 9 listed solid waste companies have disclosed computing-power-electricity coordination layouts. Wangneng Environment signed its first computing power service contract, Shengyuan Environmental Protection is advancing the Nan'an green intelligent computing center, and Grandblue Environment, Hunan Junxin Environmental Protection, and others are accelerating exploration of green power and computing power scenarios; slag repricing, self-built resource utilization capacity, and steam heating volume ramp-up are also expected to enhance profit per ton of waste and improve the receivables collection structure. AI transformation and metal resource utilization have become the sector's most distinctive growth themes, with attention on computing power leasing, AI recycling, and rare and precious metal purification (1) Computing power leasing: Infore Environment Technology Group's intelligent cloud computing business achieved revenue of RMB 686 million in 2026H1 (+3436% YoY), of which computing power leasing revenue was RMB 674 million, accounting for 8.6% of the company's revenue, as the computing power business moved from proof of concept to substantive contribution; Hebei Sailhero Environmental Protection High-tech, Zhejiang Chenfeng Technology, and others are also advancing "green power + energy storage + intelligent computing" layouts. (2) AI recycling: In March 2026, the new version of the regulations on the treatment of waste electrical and electronic products officially took effect, including AI servers in the scope of control for the first time. Leaders with dismantling qualifications, data destruction capabilities, and first-hand recycling channels are expected to benefit first. (3) Metal resource utilization: Rising prices of metals such as copper, gold, silver, bismuth, and tellurium, combined with capacity release, are driving a concentrated release of profit elasticity in hazardous waste resource utilization. Beijing GeoEnviron Engineering & Technology, Inc. and Zhefu Holding Group saw their 2026H1 net profit attributable to parent grow 103.4% and 139.5% YoY, respectively. Recommendations: (1) High-growth directions: Infore Environment Technology Group, Hangzhou Dadi Haiyang Environmental Protection, Beijing GeoEnviron Engineering & Technology, Inc., Zhefu Holding Group, Shenzhen Lions King Hi-Tech, Intco Recycling Resources, Zhejiang Chenfeng Technology, etc.; (2) Low-valuation operating assets: Grandblue Environment, Hunan Junxin Environmental Protection, Grandtop Yongxing Group, Dynagreen Environmental Protection Group, EB ENVIRONMENT, SHANGHAI IND H, GUANGDONG INV, Jiangxi Hongcheng Environment, etc. Risk warnings Orders and new businesses may fall short of expectations; policy change risk; dividend below expectations risk.