Key investment points
Different views: for the revaluation of environmental assets, we sorted out the logic of comprehensively recommending environmental assets 2.0:1) steady growth + new tools + new fields, and entered the growth 2.0 mode from single dimension to combination; 2) The marketization mechanism of the environmental protection industry was strengthened, the certainty of return was enhanced, and the value of cash flow was further highlighted; 3) The sector underestimates the value and holds low positions, and the environmental protection valuation anchor is expected to be improved under the new growth logic.
2.0 Growth Logic: steady growth + new tools + new fields. 1) Policy +: steady growth – double carbon + environmental infrastructure policy is a two-way cycle, benefiting the resource sector. The keynote of steady economic growth is clear, and policies are made ahead of schedule to accelerate infrastructure investment. At the end of 2021, the Ministry of Finance issued new special bonds for 2022 in advance, focusing on encouraging infrastructure construction such as water conservancy, municipal administration, ecological and environmental protection. In the game between steady growth and carbon emission reduction, renewable resources have become an effective way of emission reduction with both marketization and economy. 2) Mode +: a new tool – REITs improves the return on assets and opens the growth ceiling. REITs provide new choices for environmental protection companies. By issuing REITs, environmental protection enterprises revitalize assets, improve turnover rate, withdraw cash, reduce leverage, and open the development ceiling in the asset light mode. 3) Space +: a new field – the transformation of environmental high-quality assets to open up the second growth track. Many environmental protection enterprises have started the expansion of new tracks, such as new energy, wind power, recycling, power battery recycling and other new business areas, creating a second growth curve.
Cash flow: the market-oriented mechanism is strengthened, and the certainty of asset return is enhanced & cash flow is improved. The policy strengthens the market mechanism and the stability of asset return to drive the improvement of cash flow. 1) Under the guidance of carbon reduction, CCER and green power trading provide market-oriented support. CCER and green power trading provide market-oriented support for the reasonable return of environmental protection assets, highlight the economic benefits of low-carbon attributes, and help renewable energy enterprises reduce their dependence on state subsidies and effectively improve cash flow. 2) The bidding policy for waste incineration was implemented, and the C-end of the business model was straightened out. In 2021, the bidding policy of the waste incineration industry will be implemented, and the principles of low price competition and central local sharing will be clarified, which is expected to promote the start of the price adjustment mode of waste incineration and straighten it out to the residents. We expect that the increase in waste fees caused by the national subsidy and retreat slope will only account for less than 0.03% of the per capita disposable income, and the difficulty of payment from the price to the C-end can be controlled. 3) The water price is more market-oriented and the certainty of asset return is enhanced. In 2021, the new water price policy was issued, focusing on allowing the income to be bound to the market interest rate and clarifying the market-oriented return; Allow the cost supervision and review to be more operational, and the excellent operation ability will benefit more than expected; The price increase cycle is expected to match the three-year price supervision cycle.
Valuation system: new growth model + cash flow improvement + high dividend, and the valuation anchor of environmental protection assets is expected to be improved. 1) Undervalued value & low position: since 2020, the valuation of the environmental protection sector has been at the bottom. As of February 13, the TTM of Shenwan environmental protection PE (TTM) was only 22x. The renewable resources / solid waste / water sector of the sub track grew steadily, and the undervalued value of the corresponding sector highlighted the cost performance. According to wind data, the proportion of institutional asset allocation of Shenwan environmental protection sector in 2021h1 is only 0.17%, and the valuation and position of the sector are at the bottom. 2) Mode improvement: in the process of marketization of the industry and the increase of the proportion of overall operation, the proportion of cash flow and dividends has improved. With the addition of REITs holdings, the environmental protection sector with high-quality operating assets with strong cash flow value and growth is expected to usher in value revaluation. As of February 12, 2022, the Pb valuation of A-share water sector has 187% room for improvement compared with the corresponding REITs projects. 3) Overseas benchmarking: as of the end of January 2022, there is room to double the PE valuation of American water industry and American waste management, A-share water and solid waste operation sector.
Steady growth sector: focus on benefiting steady growth / high dividend / REITs logical target. 1) Recommended waste incineration [ Dynagreen Environmental Protection Group Co.Ltd(601330) ]; 2) Recommended water REITs [ Jiangxi Hongcheng Environment Co.Ltd(600461) ], [China water], recommended attention [ Beijing Capital Eco-Environment Protection Group Co.Ltd(600008) ].
New track sector: focus on benefiting from carbon emission reduction / growth targets of the new track. How to choose only one track per track? 1) Renewable resources – the most economical and market-oriented carbon reduction track: hazardous waste recycling is recommended [ Beijing Geoenviron Engineering & Technology Inc(603588) ]; Power recovery [{0029]; Recycled plastics [ Beijing Sanlian Hope Shin-Gosentechnical Service Co.Ltd(300384) ]; It is suggested to pay attention to the recycling of distiller’s grains [ Road Environment Technology Co.Ltd(688156) ]. 2) Hydrogen energy: it is suggested to pay attention to upstream hydrogen production [ Jiangxi Jovo Energy Co.Ltd(605090) ]; 3) New energy: it is suggested to pay attention to waste incineration + high nickel matte [ Zhejiang Weiming Environment Protection Co.Ltd(603568) ].
Risk tip: the policy promotion is lower than expected, the financial expenditure is lower than expected, and the industry competition is intensified.
