Incident: The company released its 2017 mid-year report. In the first half of '17, the company achieved revenue of 4,071 billion yuan, an increase of 6.11% over the previous year; realized net profit of 255 million yuan, a year-on-year decrease of 34.44%, in line with Shenwan Hongyuan's expectations. The increase in revenue was mainly due to the steady progress of the “coal-to-gas” project and the sharp increase in the company's gas sales volume. The decline in net profit to mother was mainly due to a reduction in pipeline and transportation costs. Key investment points: The reduction in terminal gas sales prices combined with the introduction of a “coal-to-gas” subsidy scheme has stimulated the year-on-year increase in downstream gas sales and revenue. In October of last year, Shaanxi Province lowered gas piping fees for non-residents by 0.121 yuan/square meter, and the price of gas terminals dropped; in '17, Shaanxi Province vigorously promoted a special operation to combat haze with an iron fist, and gave a subsidy of 1,000 yuan per household to residents implementing “coal to gas.” The drop in terminal gas sales prices combined with “coal-to-gas” subsidies jointly stimulated the growth of downstream gas demand. In the first half of the year, the company sold 3,024 billion meters of gas, an increase of 10.24% over the previous year. The sharp increase in gas sales made up for the impact of lower gas prices, and the company's revenue increased year-on-year in the first half of the year. The reduction in transportation fees led to a decline in the company's gross margin, and net profit to mother decreased year-on-year. The company's profit mainly comes from the long-term pipeline business, and the reduction in pipeline fees directly affects the company's profitability. In the first half of the year, the company achieved a comprehensive gross profit margin of 10.43%, down 4.68 percentage points from the same period last year, which in turn led to a year-on-year decrease in net profit to mother. Plan to raise additional capital to increase the coverage of the pipeline network, and sign a cooperative framework agreement to expand the gas sales business. In April '17, the company further revised its fixed increase plan. It plans to issue no more than 220 million shares and raise no more than 1.5 billion yuan in capital. The funds raised will be used for natural gas pipeline projects such as the Han'an Line and Zhonggui Line, Shangluo to Shangnan, Meixian to Longxian, Shangluo to Luonan, and Ankang to Xunyang. After the fund-raising project is put into operation, the company will add more than 488 kilometers of long-distance pipelines, increasing the annual gas transmission capacity from 13.5 billion meters to 145 billion meters. Furthermore, in the first half of the year, the company signed cooperation framework agreements with eight of these cities for the “Combating Haze with an Iron Fist” gasification project. It is expected that the scale of the company's gas sales will increase further in the future. According to the latest announcement, the company plans to issue medium-term notes with a total scale of no more than 1 billion yuan and a term of no more than 5 years in batches. After the capital raised is in place, it will further broaden the company's financing channels and optimize the financing structure. The company is speeding up the expansion of urban gas, distributed energy and other markets, and is expected to benefit from gas value-added tax cuts in the future. Currently, the national gas price reform is progressing steadily, and the natural gas price market mechanism is expected to be gradually improved to promote industry development. The company actively connects with upstream, middle and downstream enterprises to enhance the room for market growth. At present, the company has signed an agreement to increase capital for Jiangnan Natural Gas Company in Xunyang County, and is actively expanding the urban gas sector business. The company reached cooperation agreements with Shanxi Guohua Energy and Guoxin Energy to promote the interconnection of gas pipelines in Jinshan and Shaanxi. The company is also actively seeking direct supply projects such as distributed energy in Anse, space bases, and port areas. Since July 1 this year, the value-added tax rate for the natural gas industry has been lowered from 13% to 11%, reducing the corporate tax burden, and the company's profitability is expected to rise steadily. Profit forecast and rating: Considering the reduction in transportation fees and value-added tax adjustments, we maintain our estimated net profit of 3.76, 4.30, and 504 million yuan from 17 to 19, with corresponding earnings per share of 0.34, 0.39, and 0.45 yuan/share, respectively. The PE corresponding to the current stock price is 25 times, 22 times, and 19 times, respectively. As the leader of the Shaanxi pipeline network, the company is expected to benefit from the increase in downstream consumption brought about by “coal-to-gas” and the advancement of natural gas market-based reforms in the future. Maintain a “buy” rating.