the animated flag, like the animated curtain prop is not one that you can not simply click on to edit, you will have to find it on your prop list in order to delete or retexture it.
You are looking for "Flag Waving" in the prop list.
Also when texturing it..... remember to flip your texture so the correct side will be against the pole...
so you want your texture like this
not this
to make it wave simply type f into the state tab
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