Guotai Haitong: Solid waste cash flow improves, resource recovery profit elasticity releases

Guotai Haitong released a research report stating that on the environmental protection dividend front, leading solid waste and water companies have delivered steady performance and improved free cash flow, supporting high dividends. Accelerated recovery of national subsidies and contraction in capital expenditure are jointly driving dividend increases. On the renewable resources front, the release of hazardous and solid waste metal resource recovery capacity is resonating with the upward cycle in metals, driving both volume and price increases in resource recovery businesses. Demand for biodiesel and SAF remains robust, keeping the industry highly prosperous. In 2026H1, the environmental protection industry's overall performance continued to grow, with profit increments concentrated in hazardous waste and renewable resources. Guotai Haitong's main views are as follows: Industry performance continues to grow overall, with profit increments concentrated in hazardous waste and renewable resources In 2026H1, 136 listed environmental protection companies reported combined revenue of RMB 204.75 billion and net profit attributable to parent of RMB 19.66 billion, up 11.8% and 15.0% year-on-year respectively, with the median year-on-year growth rate of net profit attributable to parent at -0.9%. The hazardous waste and renewable resources sectors together contributed 90.6% of the industry's year-on-year increment in net profit attributable to parent, indicating structural growth within the industry. During the same period in 2026H1, industry free cash flow improved from RMB 12.33 billion in 2025H1 to RMB -4.56 billion. Increased operating cash flow and reduced capital expenditure jointly narrowed the cash gap. Industry-wide free cash flow improved but has not yet turned positive. Most solid waste companies saw profit improvement, with operating cash flow and dividends continuously delivered In 2026H1, 13 of 18 A-share solid waste companies reported year-on-year improvement in net profit attributable to parent, with a median year-on-year growth rate of 10.8%. The sector's operating cash flow increased by RMB 1.64 billion year-on-year, and free cash flow increased by RMB 1.20 billion year-on-year to RMB 5.24 billion. For full-year 2025, total cash dividends from solid waste companies amounted to RMB 5.50 billion, up 16.4% year-on-year. Total cash dividends as a proportion of net profit attributable to parent rose from 30.8% in 2023 to 47.0% in 2025, with shareholder returns continuing to improve. Resource recovery leaders' profit elasticity released, cash realization capability diverging In 2026H1, Beijing GeoEnviron Engineering & Technology, Inc., Guangdong Feinan Resources Recycling and Zhefu Holding Group reported combined revenue and net profit attributable to parent up 41.3% and 146.5% year-on-year respectively, with weighted gross margin up 4.2pct year-on-year to 16.6%. Capacity release and improved metal prices jointly drove profit growth. However, the three companies showed notable differences in cash flow performance: Zhefu Holding Group had free cash flow of RMB 1.06 billion, while Beijing GeoEnviron Engineering & Technology, Inc. and Guangdong Feinan Resources Recycling had free cash flow of RMB -830 million and RMB -1.05 billion respectively. Scale expansion is accompanied by working capital investment; going forward, attention should be paid to production and sales, gross margin, inventory turnover and collection progress. Investment recommendations 1) Environmental protection dividend: Leading solid waste and water companies have steady performance and improved free cash flow, supporting high dividends. Solid waste: Accelerated recovery of national subsidies is driving improvement in operating cash flow; as the waste incineration industry enters maturity, leading companies' capital expenditure is generally contracting. Both factors jointly drive free cash flow improvement, laying the foundation for dividend increases. Water: Leading companies have stable operating cash flow and controllable capital expenditure, with strong high-dividend capability. Recommended: EB ENVIRONMENT, Dynagreen Environmental Protection Group, Grandblue Environment, Chongqing Sanfeng Environment Group Corp., GUANGDONG INV, Wangneng Environment, Zhejiang Weiming Environment Protection; related targets include Grandtop Yongxing Group, Jiangxi Hongcheng Environment, Hunan Junxin Environmental Protection, Beijing Capital Eco-Environment Protection Group, Chengdu Xingrong Environment. 2) Renewable resources: Recycled metals: The release of hazardous and solid waste metal resource recovery capacity is resonating with the upward cycle in metals, driving both volume and price increases in resource recovery businesses. Recommended: Beijing GeoEnviron Engineering & Technology, Inc.; related targets: Guangdong Feinan Resources Recycling, Zhefu Holding Group. Recycled oil: Demand for biodiesel and SAF remains robust, keeping the industry highly prosperous. Recommended: Longyan Zhuoyue New Energy; related targets: Shandong High Speed Renewable Energy, Shenzhen Lions King Hi-Tech, Beijing Haixin Energy Technology. Risk warnings Industry policy changes, project collections below expectations, dividends below expectations, project progress below expectations, sharp fluctuations in commodity prices, etc.