Guotai Haitong Securities Co., Ltd. (GTHT) has published a research report highlighting two key investment themes within the environmental protection sector. The firm notes that solid waste and water utility leaders are delivering stable earnings with improving free cash flow, which supports generous dividend payouts. This improvement is driven by faster government subsidy recovery and reduced capital expenditure. Concurrently, in the recycling resources segment, the release of new hazardous solid waste metal recovery capacity is coinciding with a strong metal market cycle, leading to both higher volumes and better prices. Additionally, demand for biodiesel and sustainable aviation fuel (SAF) remains robust, keeping the industry at high prosperity levels.

For the first half of 2026, the environmental industry is expected to sustain overall earnings growth, with profit increases concentrated in hazardous waste treatment and resource recovery. Specifically, across 136 listed environmental companies, total revenue reached RMB 204.75 billion, and net profit attributable to shareholders hit RMB 19.66 billion, representing year-on-year growth of 11.8% and 15.0%, respectively. While the median growth rate for attributable net profit was -0.9%, the hazardous waste and resource recovery sectors collectively contributed 90.6% of the industry's total profit increment, underscoring the structural nature of this expansion. Furthermore, the industry's free cash flow improved from RMB 12.33 billion in H1 2025 to RMB -4.56 billion in H1 2026, driven by increased operating cash flow and reduced capital spending, although it has yet to turn positive.

Within the solid waste segment, most companies have seen earnings improve. Of the 18 A-share solid waste companies, 13 reported year-on-year profit growth, with a median increase of 10.8%. The sector's operating cash flow rose by RMB 1.64 billion year-on-year, and free cash flow increased by RMB 1.20 billion to RMB 5.24 billion. For fiscal 2025, cash dividends from solid waste companies totaled RMB 5.50 billion, up 16.4% year-on-year. The payout ratio relative to attributable net profit has climbed from 30.8% in 2023 to 47.0% in 2025, demonstrating a consistent enhancement of shareholder returns.

In the resource recovery segment, leading companies are unlocking significant earnings elasticity. Combined figures for Beijing GeoEnviron Engineering & Technology Inc., Guangdong Feinan Resources Recycling Co., Ltd., and Zhefu Holding Group Co., Ltd. show a 41.3% increase in revenue and a remarkable 146.5% surge in attributable net profit for H1 2026. Their weighted average gross margin improved by 4.2 percentage points to 16.6%, fueled by new capacity and better metal prices. However, cash generation diverges sharply among these three: Zhefu Holding Group Co., Ltd. generated RMB 1.06 billion in free cash flow, whereas Beijing GeoEnviron Engineering & Technology Inc. and Guangdong Feinan Resources Recycling Co., Ltd. reported negative free cash flows of RMB -830 million and RMB -1.05 billion, respectively. The expansion of scale is tied to working capital investment, so future monitoring of production-sales balance, gross margins, inventory turnover, and payment collection progress will be crucial.

Where to Begin Investing

1) Environmental Dividends: Investors should focus on solid waste and water utility leaders with stable operations, improving free cash flow, and strong dividend capacity. In the solid waste sector, accelerated government subsidy recovery and shrinking capital expenditure among incumbents are paving the way for higher dividends. Water utilities are also well-positioned due to stable operating cash flow and manageable capital spending. China Everbright Environment Group Ltd., China Dynami Green Energy Co., Ltd., Beijing Enterprises Water Group Ltd. (Hanlan Environment), Chongqing Sanfeng Environment Group Corp., Ltd., Guangdong Investment Ltd. (Yuehai Investment), Wangneng Environment Co., Ltd., and Zhejiang Weiming Environment Protection Co., Ltd. are all recommended. Other relevant names include Yongxing Holding Co., Ltd., Jiangxi Hongcheng Waterworks Co., Ltd., Junxin Environmental Protection Co., Ltd., Beijing Capital Eco-Environment Protection Group Co., Ltd., and Chengdu Xingrong Environment Co., Ltd..

2) Resource Recovery: For recycled metals, capacity expansion combined with favorable metal prices supports a bullish outlook, leading to a recommendation for Beijing GeoEnviron Engineering & Technology Inc., with Guangdong Feinan Resources Recycling Co., Ltd. and Zhefu Holding Group Co., Ltd. as related targets. In the recycled oil space, robust demand for biodiesel and SAF keeps the industry at high prosperity, making Zhejiang Excellence New Energy Co., Ltd. a top pick, along with related names such as Shanhigh Environment & Energy Co., Ltd., Landson Environmental Technology Co., Ltd., and Beijing Haixin Energy Technology Co., Ltd..

Risk Warnings

Key risks include policy changes in the industry, lower-than-expected project collections, dividend shortfalls, project delays, and significant volatility in commodity prices.