Dongwu Securities released a research report saying that waste incineration is the lowest rated in utilities, and is currently in two critical periods of “continuous improvement in free cash flow” and “increase in green certificate value.”
The Zhitong Finance App learned that Dongwu Securities released a research report saying that waste incineration is the lowest rated in utilities and is currently in two critical periods of “continuous improvement in free cash flow” and “increase in the value of green certificates.” 1) Valuation: Solid waste is the lowest estimated in utilities, corresponding to 2024, generally less than 10 times, at a discount compared to water and gas. After entering a stable operation period, there is plenty of room to improve the valuation of leading overseas solid waste companies. 2) Cash flow: Free cash flow from solid waste has been positive, and corporate dividend plans have been implemented one after another. 3) Green certificate: Grid factor update+green certificate purchase to offset energy consumption assessment policy = green certificate value increase. Currently, the green certificate for waste incineration corresponds to 0.03 yuan of electricity, which is expected to match the actual carbon reduction value of 0.08 yuan/degree in the long term.
Related targets: Focus on recommending Everbright Environment (00257), Hanlan Environment (600323.SH), etc., and it is recommended to focus on Sanfeng Environment (601827.SH), Junxin Co., Ltd. (301109.SZ), Yongxing Co., Ltd. (601033.SH), etc.
The main views of Dongwu Securities are as follows:
Grid Emission Factors Update:
The first announcement was made to eliminate the carbon emission factors of market-based green electricity transactions, solve the dual calculation problem of green electricity, and create conditions for the green certificate to be included in the carbon accounting system. On April 12, 2024, the Ministry of Ecology and Environment announced that the 2021 national electricity average carbon dioxide emission factor is 0.5568 kgCO2/kWh, and further detailed disclosure that the electricity emission factor after deducting market-based transactions of non-fossil energy electricity is 0.5942 kgCO2/kWh.
Earlier, on March 15, 2024, the Ministry of Ecology and Environment issued a notice to publicly solicit opinions on the “Corporate Greenhouse Gas Emissions Accounting and Reporting Guidelines for the Aluminum Smelting Industry”. The guidelines proposed the use of 0.5942 tCO2/MWH as an electricity emission factor, and the explanation was that compared with the 2022 average carbon emission factor of the national power grid, 0.5703 tCO2/MWh, excluding market-based transactions of non-fossil energy electricity. The detailed update of power grid emission factors aims to solve the problem of dual calculation of environmental attributes of green electricity, promote the integration and coordination of green power green certificates and carbon emission accounting systems, and help enhance the recognition of the value of green electricity and green certificates at home and abroad.
Energy consumption assessments are getting stricter:
The New Deal clearly offsets 50% of the energy saving target by purchasing green certificates. It is estimated that the demand for green certificates in 2025 will correspond to about 3.4 trillion kilowatts of green electricity, exceeding the theoretical supply in 2023. In February 2024, the National Development and Reform Commission issued a notice to include the amount of electricity traded under the Green Certificate in the calculation of energy efficiency assessment indicators. In principle, it will not exceed 50% of the energy savings required by the region to achieve the “14th Five-Year Plan” energy consumption intensity reduction target.
1) Demand side: The “14th Five-Year Plan” plan outline uses “13.5% reduction in energy consumption per unit of GDP” as one of the main binding indicators. In 2021-2023, China's energy consumption per unit of GDP decreased by 2.70%, 0.10%, and 0.50%, respectively. The government work report proposed the goal of reducing energy consumption per unit of GDP by about 2.5% in 2024. According to this, Dongwu Securities estimates that in order to achieve the 14th Five-Year Energy Consumption Target, the theoretical demand for a green certificate in 2025 will cover about 3.39 trillion kilowatts of green electricity.
2) Supply side: In August 2023, the Development and Reform Commission made it clear that renewable energy green certificates will be issued to achieve full coverage, and will not issue tradable green certificates for existing conventional hydropower projects. In 2023, China's hydropower, wind power, solar energy, biomass, geothermal energy, and marine energy generated a total of 2.95 trillion kilowatts, an increase of 8.3% over the previous year. The total value after excluding hydropower was 1.67 trillion kilowatts, an increase of 21.4% over the previous year. The supply of tradable green certificates in 2023 corresponds to about 1.67 trillion kilowatts of green electricity, and will increase further in the future as renewable energy generation increases.
Pay attention to the increase in the value of waste incineration green certificates:
1) The green certificate transaction for waste incineration commences. The green certificate proceeds from expiring national supply/unsubsidized projects are owned by the enterprise, and the green certificate revenue for projects within the national supplement period is reduced by an equal amount when the central financial subsidy is issued. The initial green certificate applications for waste incineration companies focused on expiring national subsidies and new projects put into operation.
2) Currently, the green certificate for waste incineration corresponds to 0.03 yuan of electricity, which is expected to be in line with the actual carbon reduction value in the long term. According to the average trading price of 60 yuan/ton in the national carbon market quota from 2021/7/16 to 2024/4/12, the carbon reduction value of electricity is 0.08 yuan/degree. As of 2024/4/12, the carbon price is 91.84 yuan/ton. Long-term carbon restrictions have strengthened the carbon price, and the carbon reduction value of waste incineration electricity will increase accordingly. With the release of demand for green certificates and active transactions, and the improvement of the connection mechanism between green certificates and the carbon market, the green certificate price is expected to be in line with the actual green value.
3) Green certificate market-based transactions to improve cash flow & boost profits. ① Improve cash flow for projects during the subsidy period: Dongwu Securities estimates that the net present ratio of the project is 1.70 under normal subsidy conditions, and the green license price is 30, 80, and 120 yuan/hour, and the net present ratio is expected to rise to 1.85, 2.11, and 2.31. ② Boosting profits for the No State Supplement Project: When there is no green certificate revenue, the net profit of the No State Supplement project is -50% compared to the national supplement project; when the green license price is 30, 80, and 120 yuan/unit, the net profit is +23%, 61%, and 91% compared to the income situation without a green license.
Risk warning: Policy implementation progress falls short of expectations, declining carbon prices, accounts receivable recovery risks, etc.