Profit is expected to increase significantly in the second quarter.

Jinhong Energy reported a 3050% year-on-year increase in net profit in the first half of 2017 to 170 million yuan. The company's net profit in the first quarter was about 85 million yuan, an increase of only 0.7 percent over the same period last year. According to the announcement, the company's second-quarter net profit may reach 0.9-110 million yuan, an increase of 82% to 137% over the same period last year.

Pay attention to the main points

The second quarter may benefit from a sharp rise in gas volume and a recovery in gross margin. We estimate that thanks to the strong promotion of coal to gas in Hebei Province and the low base effect of 2016, the growth rate of the company's gas sales may be close to or even exceed 30% in the first and second quarters. However, due to Petrochina Company Limited winter gate price increase, the company's downstream industrial users are not complete, the gross margin may decline by about 0.10 yuan / cubic meter in the first quarter, making the profit growth rate much lower than the gas growth rate. After March 15, the price of non-resident entrance stations has been generally adjusted, and we estimate that the company's gross margin may gradually recover to about 0.60 yuan / cubic meter in the second quarter.

Subsequent accelerated growth may further rely on debt financing, and financial cost pressure may accumulate.

The company's announcement shows that the proposed non-public offering of bonds does not exceed 1.5 billion yuan, and the specific use and cost of the funds have yet to be confirmed by the shareholders' meeting. We estimate that debt financing will probably mainly serve epitaxial expansion and pipeline construction. By the end of the first quarter of 2017, the company's net debt was about 4.5 billion yuan, an increase of 30% over the end of 2016, and the net debt / equity ratio had increased to 112% from 88% at the end of last year. The financial expense in the first quarter is about 46 million yuan, and we estimate that the average financial cost of the company may be about 4% at present. If 1.5 billion yuan of private bonds are successfully issued, the company's net debt ratio may climb to 150 percent, and the annual financial cost may rise from 210 million yuan in 2016 to more than 280 million yuan.

There is still great uncertainty about actual earnings in the second quarter. The company's forecast for second-quarter profit is too early, and the estimated profit range is still large, which may imply more assumptions.

We do not rule out the possibility that the actual profit may differ from the announcement.

Valuation and suggestion

We maintain the 2017 earnings forecast of 0.65 yuan per share and introduce the 2018 profit forecast of 0.77 yuan. Considering that the company's past extension expansion has not been smooth and that the rapid increase in financial costs may offset the profits from acquisitions, our current forecast does not include the profit growth that may be brought about by extension expansion. The company's gas sales this year are likely to benefit from the conversion from coal to gas in North China, the growth rate of gas sales may exceed that of national gas companies, and the stock price still has some room to rise. Maintain a target price of 18 yuan and a "neutral" rating, corresponding to 23 times 2018 price-to-earnings ratio, which is 13% higher than the current stock price.

Risk.

Natural gas demand is weaker than expected, pipeline transportation fees are greatly reduced, and M & A risks.