Core Viewpoint - The acceleration of national subsidies recovery will enhance the cash flow value of the environmental protection sector, particularly in the waste incineration segment, which is expected to see improved cash flow and dividend potential due to reduced capital expenditures and increased operational cash flow [1][2]. Group 1: National Subsidy Recovery - The average account period for national subsidies in waste incineration enterprises remains stable at around two years, with a slowdown in the growth of outstanding payments [2]. - The national subsidy recovery rate has significantly accelerated in Q3 2025, improving cash flow and reversing credit impairment losses [2]. - The estimated national subsidy recovery rate for enterprises in Q1-Q3 2025 is approximately 40% to 199%, with an average of about 89%, a notable increase from the 39% average in 2024 [2]. Group 2: Renewable Energy Subsidy Fund - The renewable energy development fund's income is expected to achieve a balance around 2025, with historical outstanding payments projected to reach a maximum of 4,355 billion yuan [3]. - The fund's income has been increasing annually, while expenditures have reached their limit due to the decline in benchmark electricity prices and the acceleration of new energy installations [3]. Group 3: Dividend Potential Calculation - The potential for dividends in the waste incineration sector is projected to increase from 114% to 141% as capital expenditures decrease to maintenance levels and the national subsidy recovery rate improves from 40% to 100% [4].

Investment Rating - The report maintains an "Accumulate" rating for the environmental protection industry, specifically focusing on the waste incineration sector [1]. Core Insights - The report highlights the dual drivers of improved operating cash flow in the waste incineration sector: a decrease in capital expenditure and accelerated national subsidies. Since 2023, the sector has seen an improvement in free cash flow and dividend capacity primarily due to reduced capital expenditures [3][5]. - The report estimates that when capital expenditures reach maintenance levels (1.5% of total assets), the dividend potential for 2024 could be as high as 141% [3]. - The national subsidy recovery is expected to accelerate significantly in 2025, with a projected average recovery rate of around 89%, up from 39% in 2024 [3][21]. Summary by Sections 1. National Subsidy Recovery for Waste Incineration - The average account period for national subsidies is stable at around 2 years, with a slowdown in the growth of outstanding payments [8][10]. - The national subsidy recovery rate for the waste incineration sector has improved significantly, with a single-quarter operating cash flow net amount of 6.33 billion RMB in Q3 2025, reflecting a year-on-year increase of 59% [13][15]. - Companies like Guangda Environment and Huanlan Environment have reported substantial improvements in subsidy recovery, with Guangda receiving approximately 20.64 billion RMB in subsidies from July to August 2025 [14][20]. 2. Renewable Energy Subsidy Fund - The renewable energy development fund is expected to reach a balance between income and expenditure around 2025, allowing for the gradual clearance of outstanding subsidies [24][25]. - The fund's income has been steadily increasing, while expenditure has reached its limit, indicating a potential for future surplus [24][25]. - By 2036, it is anticipated that historical outstanding subsidies will be resolved naturally as the pressure from subsidy expenditures decreases [25]. 3. Dividend Potential Assessment - The report calculates that the dividend potential for the waste incineration sector could rise from 114% to 141% with the acceleration of national subsidy recovery [3][19]. - The improvement in cash flow from national subsidies is expected to enhance the cash flow value of the sector, supporting the logic of increasing dividends and return on equity (ROE) [3][19]. - Key companies recommended for investment based on their dividend value include Huanlan Environment, Green Power, and Guangda Environment [3].