Due to the macroeconomic recovery falling short of expectations and the downward trend of commodity prices, the environmental protection industry's revenue and profit in the first half of 2024 are relatively under pressure, and the year-on-year growth rate of cash flow has narrowed. However, the increase in the proportion of net profit attributable to the parent company still indicates a continuous improvement in operating quality.
According to the Zhixin Finance and Economics App, Haitong Securities released a research report stating that due to the macroeconomic recovery falling short of expectations and the downward trend of commodity prices, the environmental protection industry's revenue and profit in the first half of 2024 are relatively under pressure, and the year-on-year growth rate of cash flow has narrowed. However, the increase in the proportion of net profit attributable to the parent company still indicates a continuous improvement in operating quality. It is worth mentioning that the water treatment industry has entered a mature stage. In the first half of 2024, the proportion of engineering revenue and capital expenditure has decreased, but the decline in engineering income has slowed down, and accounts receivable is still growing, with no improvement in payments. Capital expenditure of waste incineration has also decreased, and the operating quality has steadily improved. The cash flow of the sector has continued to improve, and it has the conditions for increasing dividends.
The main points of Haitong Securities are as follows:
In the first half of 2024, the revenue of the environmental protection industry increased by 1.53% year-on-year, and the proportion of operating cash flow to net profit attributable to the parent company increased by 8%.
In the first half of 2024, the operating income of the environmental protection industry increased by 1.53% year-on-year to 250.9 billion yuan, and the net profit attributable to the parent company decreased by 10% year-on-year to 20.2 billion yuan. The gross profit margin is about 28%, the same as in the first half of 2023, and the median ROE has decreased by 0.35 percentage points to 3.5%. Capital expenditure increased by 5% year-on-year to 38.5 billion yuan; net operating cash flow increased by 2% year-on-year to 13.1 billion yuan, and the proportion of operating cash flow to net profit attributable to the parent company increased by 8% to 65%. Haitong Securities believes that due to the macroeconomic recovery falling short of expectations and the downward trend of commodity prices, the environmental protection industry's revenue and profit in the first half of 2024 are relatively under pressure, and the year-on-year growth rate of cash flow has narrowed. However, the increase in the proportion of net profit attributable to the parent company still indicates a continuous improvement in operating quality.
Improvement is needed in accounts receivable for water treatment, and the membrane industry should pay attention to the progress of high-end substitution.
The water treatment industry has entered a mature stage. In the first half of 2024, the proportion of engineering revenue and capital expenditure has decreased, but the decline in engineering income has slowed down, and accounts receivable is still growing, with no improvement in payments. The current dividend yield is about 2%, and the PE TTM valuation is about 15 times. In the long run, it is optimistic about stable cash flow and assets with high dividend potential. It is recommended to pay attention to: Jiangxi Hongcheng Environment (600461.SH) and Beijing Enterprises Water Group (00371). In the first half of 2024, the membrane industry will benefit from the decrease in raw material costs, the recovery of gross margin, and a substantial increase in net profit attributable to the parent company. Haitong Securities believes that China's membrane industry is transitioning from a growth phase to a mature phase, gradually expanding into high-end membrane technology applications, and is expected to replace imported materials and equipment.
Sanitation: The industry continues to be market-oriented, with greening and intelligentization being important trends in the industry.
In 24H1, the main listed companies in the sanitation industry saw a year-on-year increase of 5% in revenue to 16.7 billion yuan, with a gross margin of 26% which is the same as 23H1, and a year-on-year decrease of 9% in net income attributable to the parent to 0.7 billion yuan. The sanitation industry continues to be market-oriented, with a decrease in concentration, increased competition, and greening and intelligentization being important trends in the industry. The annualized total amount of new orders in 24H1 reached a historical new high, but the industry's accounts receivable and collection days continue to increase. The current PE TTM of the sector is about 12 times. Considering the pressure on local finance and the competition from local environmental protection groups, the sustainability of valuation recovery needs to be verified in the absence of obvious improvement in the sector's structure.
Equipment renewal boosts demand, and high-end energy-saving equipment is expected to benefit.
Haitong Securities believes that as key energy-consuming industries accelerate energy-saving and emission reduction, and both domestic and international carbon markets continue to develop, the energy-saving equipment industry is expected to continue to benefit. Recommended stocks to watch: Shuangliang Eco-Energy Systems, Ruichen Environmental Protection, Nanfang Zhongjin Environment, and Jingjin Equipment. With the rise of AI artificial intelligence and the expected recovery of downstream terminal market demand, the semiconductor industry's business climate is expected to rebound, and orders for semiconductor waste gas treatment systems and process-related equipment are expected to continue to grow. Recommended stocks to watch: Meiai Technology (688376.SH) and Qingdao Guolin Technology Group (300786.SZ).
Resource utilization: significant increase in net income, and the introduction of policies is expected to boost industry demand.
In 2024H1, the main listed companies in the resource utilization industry saw a year-on-year increase of 18% in revenue to 76.3 billion yuan, with a gross margin of 15.6% which is essentially the same as the same period in 23 years, and a year-on-year increase of 51% in net income attributable to the parent to 2.4 billion yuan. Looking within the sector, there is a polarization in performance, with traditional resource utilization companies experiencing performance pressure due to fluctuations in commodity prices, while companies in the extended new materials field have embarked on a second growth curve, driving overall industry profit improvement.
Haitong Securities believes that on the one hand, benefiting from the introduction of the "Promotion of Large-scale Equipment Renewal and Replacement of Consumer Goods" program, it will drive the demand for resource recycling, and scrapped cars are expected to benefit from the blossoming billion-dollar market. On the other hand, the expected interest rate cut in the United States will boost commodity prices, which will help improve the recycling resources industry. Recommended stocks to watch: Jiangsu Huahong Technology (002645.SZ), Qingdao Huicheng Environmental Technology Group (300779.SZ), Earth Ocean (301068.SZ), Miracle Automation Engineering (002009.SZ), Wangneng Environment (002034.SZ), and Dongjiang Environmental (002672.SZ).
Solid waste: In 24H1, the operating quality continued to improve, capital expenditure continued to decline, and dividend distribution is expected.
In the first half of 2024, the revenue of the major listed companies in the solid waste industry increased by +0.74% year-on-year to 43.1 billion yuan, with the proportion of engineering revenue decreasing by -6.5 percentage points year-on-year to 22%, and the net income attributable to the parent company increased by 5% year-on-year to 7.8 billion yuan. Operating net cash flow increased by 44% year-on-year to 7.6 billion yuan, while capital expenditures decreased by 40% year-on-year to 6.2 billion yuan. Haitong Securities believes that with the decrease in capital expenditures for waste incineration, steady improvement in operating quality, continuous improvement in sector cash flow, the sector has the conditions to increase dividends. The dividend payout ratio for the first half of 2024 is 25%, an increase of 5 percentage points year-on-year, and the TTM dividend yield is approximately 2.84%. The current TTM PE valuation of the sector is only 10 times, highlighting investment opportunities awaiting valuation recovery.
Investment Advice: In order to promote the transformation from energy consumption control to carbon emission control, a wide range of green and low-carbon demonstration projects are expected to be fully implemented, coupled with accelerated carbon market construction, injecting vitality into the environmental protection industry. In 2024, it is recommended to focus on two main themes: High Dividends: Focus on the waste incineration and water affairs sectors. With decreasing capital expenditures, stable operating cash flow can support higher dividends, thus enhancing the currently undervalued positions; Sub-sectors related to economic recovery and carbon market construction, focusing on improving resource recycling efficiency, cost reduction, carbon reduction. It is advised to pay attention to: semiconductor-related equipment, non-ferrous waste acid treatment, carbon monitoring, environmental sanitation services, and metal resource utilization benefiting from industrial recovery.
Risk Warning: Industry recovery falling below expectations, policy implementation below expectations, and demand release falling below expectations.
