GF Securities has released a research report indicating that the environmental protection industry is showing steady earnings recovery, with growing opportunities emerging in the AI-driven computing and metal resource recovery segments.

For the first half of 2026, the environmental sector posted total operating revenue of RMB 189.9 billion, up 10.7% year-on-year. Net profit attributable to shareholders reached RMB 16.8 billion, a 7.1% increase, while non-GAAP net profit rose 13.4% to RMB 15.7 billion. The sector maintained positive earnings growth, and institutional positioning has dropped to near historical lows.

Solid waste management and water utilities continue to offer compelling value through low valuations, high dividend yields, and strong cash flow generation. Meanwhile, new growth drivers are emerging from computing-electricity integration, slag resource recovery, and green steam production, according to the report.

The sector's most distinctive growth themes center on AI transformation and metal resource recovery. GF Securities highlights opportunities in computing power leasing, AI-driven recycling, and precious metal purification, recommending investors focus on high-growth segments alongside undervalued operating assets.

Sector Earnings Continue Recovery in H1 2026 with Notable Cash Flow Improvements

The environmental sector generated RMB 189.9 billion in operating revenue during the first half of 2026, up 10.7% year-on-year. Net profit attributable to shareholders increased 7.1% to RMB 16.8 billion, while non-GAAP net profit grew 13.4% to RMB 15.7 billion. In the second quarter specifically, non-GAAP net profit rose 4.1% year-on-year, underscoring sustained profitability.

Breaking down the structure, solid waste and water utility companies delivered non-GAAP net profit of RMB 10 billion, a slight 0.7% dip, demonstrating resilience in operating assets. Other companies saw non-GAAP net profit surge 50.1% to RMB 5.8 billion, driven primarily by the hazardous waste resource recovery segment, which posted non-GAAP net profit of RMB 3.17 billion—a remarkable 186.0% year-on-year jump.

Cash flow improvements were even more pronounced. Operating cash flow net inflows climbed 32.3% year-on-year to RMB 16.2 billion, while investing cash flow net outflows narrowed by 39.6% to RMB 19.7 billion. Simplified free cash flow improved significantly from a negative RMB 20.4 billion in the prior-year period to a negative RMB 3.5 billion. Notably, fund allocation to environmental stocks stood at just 0.12% by the end of Q2 2026, near the lowest levels since 2013.

Solid Waste and Water Utilities Show Stable Core Operations with Expanding Growth Potential

During the first half of 2026, the waste-to-energy and water utility sectors generated operating revenue of RMB 27.9 billion and RMB 35.2 billion respectively, up 5.7% and 4.4% year-on-year. Their non-GAAP net profits were RMB 5.5 billion and RMB 4.5 billion, modestly down 0.3% and 1.2%, reflecting steady core operations.

With the peak investment cycle now passed, simplified free cash flow for the waste-to-energy sector turned positive at RMB 4.5 billion, up from a negative RMB 5.2 billion previously. The water utility sector improved from negative RMB 5.3 billion to negative RMB 1.9 billion, even achieving approximately RMB 2.7 billion in positive free cash flow during Q2 2026 alone.

Dividend enhancement continues to deliver results. Among 27 representative solid waste and water utility companies with high dividend payouts, the average dividend payout ratio rose from 29.5% in 2021 to 45.0% in 2025, while dividend yields climbed from 3.17% to 4.13%. Based on Wind consensus estimates, mainstream companies are trading at 7 to 15 times 2026 projected earnings.

On the growth front, nine listed solid waste companies have disclosed computing-electricity integration plans. Wangneng Environment has signed its first computing power services contract, Shengyuan Environmental Protection is advancing the Nan'an Green Intelligent Computing Center, and Hanlan Environment, Junxin Shares, and others are accelerating green power and computing scenario explorations. Additionally, slag repricing, self-built resource recovery capacity, and expanded steam heating supply are expected to boost per-ton waste profits and improve payment structures.

AI Transformation and Metal Recovery Emerge as Defining Growth Narratives

In computing power leasing, Infore Environment's intelligent cloud computing business generated RMB 686 million in H1 2026 revenue, a staggering 3,436% year-on-year increase. Computing power leasing alone contributed RMB 674 million, representing 8.6% of total company revenue, signaling the segment has moved from concept validation to tangible contribution. Xianhe Environmental Protection and Chenfeng Technology are also advancing "green power + energy storage + intelligent computing" initiatives.

Regarding AI-driven recycling, the revised regulations for waste electrical and electronic products processing took effect in March 2026, marking the first time artificial intelligence servers fall under regulatory oversight. Companies with dismantling qualifications, data destruction capabilities, and direct recycling channels are positioned to benefit first.

In metal resource recovery, rising prices for copper, gold, silver, bismuth, and tellurium, combined with capacity expansions, are unleashing significant earnings elasticity in hazardous waste recovery. BGE and Zhefu Holding saw H1 2026 net profits attributable to shareholders surge 103.4% and 139.5% year-on-year respectively.

Investment Recommendations

GF Securities advises focusing on two key areas: high-growth directions including Infore Environment, Dadi Ocean, BGE, Zhefu Holding, Lankun Technology, Intco Recycling, and Chenfeng Technology, as well as undervalued operating assets such as Hanlan Environment, Junxin Shares, Yongxing Shares, Dynagreen Environmental Protection, China Everbright Environment, Shanghai Industrial Holdings, Guangdong Investment, and Hongcheng Environment.

Key risks include order volumes and new business underperforming expectations, policy changes, and dividend yields falling short of forecasts.