Main points of investment:
Victory shares publishes its 2016 semi-annual report. In the first half of 2016, Shengli shares achieved operating income of 1.191 billion yuan,-20.12% year-on-year; net profit attributed to the parent company was 18.4681 million yuan, 7.72% year-on-year; and the weighted average return on net assets was 0.92%. In terms of the target per share, the company achieved EPS of 0.02 yuan in the first half of the year, the net cash flow generated by operating activities per share was-0.06 yuan, and the net assets per share belonging to the shareholders of the listed company was 2.78 yuan.
The natural gas business has become the company's main source of profit. The company has accelerated the pace of strategic transformation, and the natural gas business continues to maintain a momentum of rapid growth. The company accelerates the acquisition and merger with the management right of natural gas cities as the core, taking into account the development of upstream and downstream innovation business of natural gas, has successively completed the cooperation of projects such as Puyang in Henan, Bazhou in Hebei, Pulandian in Dalian, Puwan New area and Zhuanghe in Dalian, and the scale of natural gas has increased rapidly. In the first half of the year, the company's natural gas business realized operating income of 534 million yuan, an increase of 85.05% over the same period last year, accounting for 44.9% of the company's total revenue, and a gross profit of 109 million yuan, an increase of 64.7% over the same period last year, becoming the company's main source of profit.
The impairment of agrochemical business is a drag on the company's performance. In the first half of the year, the company calculated the asset impairment loss of 66.1626 million yuan, a sharp increase of 605.13% over the same period last year, mainly because some of the production lines of Dongying Shengli Green Field Pesticide and Chemical Co., Ltd. stopped production. The company comprehensively considered the strategic arrangement of the withdrawal of traditional industries, the urgency of environmental protection emission reduction and the economic provision for impairment of production activities, which dragged down the company's performance. In addition, the company achieved an investment income of 64.9955 million yuan in the first half of the year, a substantial increase of 727.05% over the same period last year, mainly due to the transfer of 100% equity in Shandong Luyu Trading Co., Ltd.
It is proposed to issue shares to purchase natural gas and other urban operating assets, and raise supporting funds. Shengli shares plan to purchase 100% equity of Jingzhou Natural Gas Development Co., Ltd., held by Jingzhou Jinghu Real Estate Development Co., Ltd., Chongqing Xianda Industrial Co., Ltd., and Bazhou Shunda Natural Gas Co., Ltd. hold 49% equity interest in Bazhou Shunda Gas Co., Ltd., and raise supporting funds at the same time. This transaction will help the company to expand the natural gas market and gradually improve the industrial chain.
Make use of terminal resources to develop automobile recharging business. In order to develop new energy business, Shengli Shengli signed a "strategic cooperation agreement" with Qingdao Trider to jointly promote strategic cooperation in the field of automobile charging. This strong alliance starts from the terminal fields such as gas filling stations owned by Shengli shares to promote the cooperation of new energy vehicle charging business. Through this strategic cooperation company will cut into the field of automobile recharging, make use of the existing market terminal network to create a multi-level new energy supply system, and open up new business growth points.
Profit forecast and investment rating. We expect the EPS of Shengli shares to be 0.17,0.37 and 0.40 yuan respectively from 2016 to 2018. According to the 2017 EPS and 20 times price-to-earnings ratio, we give the company a target price of 7.40 yuan and maintain the "overweight" investment rating.
Risk tips: transformation risk; the progress of natural gas business development is not as expected.