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The company recently released its 2017 semi-annual performance report, with revenue of 224 million during the reporting period, down 3.88% from the same period last year. The net profit of shareholders belonging to listed companies was 9 million, up 42.12% from the same period last year. After deducting non-profits, the net profit of shareholders belonging to the parent company was 9 million, up 16.60% from the same period last year. In this regard, our comments are as follows:

Comments:

Commercial retail is a drag on revenue growth, and changes in the scope of the merger lead to a substantial increase in net profit. The company achieved revenue of 224 million in the first half of 2017, down 3.88% from the same period last year; the net profit of shareholders belonging to listed companies was 9 million, up 42.12% from the same period last year; and the net profit of shareholders belonging to the parent company was 9 million, up 16.60% from the same period last year.

The company's revenue mainly comes from three businesses: 1) urban pipeline gas business, with revenue of 186 million in the first half, up 158.98% from the same period last year; gross profit margin 25.01%, down 13.48 pct from the same period last year. 2) Commercial retail business, revenue in the first half of the year was 8 million, down 94.19% from the same period last year; gross profit margin was 6.82%, down 7.60pct from the same period last year. 3) other main businesses, revenue in the first half of the year was 19 million, an increase of 54.50% over the same period last year, and gross profit margin was 80.62%, an increase of 3.20pct over the same period last year. The slight decline in revenue is due to the company's accelerated withdrawal from commercial retail business, the closure of Chengdu Hualian business on June 30, 2016, and a significant decrease in revenue in the reporting period compared with the same period last year. And the joint impact of the increase in income of new subsidiaries Quaneng Natural Gas and Luojiang Natural Gas during the reporting period from January to May on May 31, 2016 The sharp increase in net profit was due to the fact that the two companies made a net profit of 17.18 million yuan (accounting for 184.08% of the net profit) attributable to shareholders of listed companies during the reporting period, an increase of 14.11 million yuan over 3.07 million yuan in the same period last year due to inconsistency during the merger period.

The sales expenses decreased significantly, and the financial expenses increased significantly. In the first half of the year, the company's sales expenses were 13 million yuan, down 44.80% from the same period last year; management expenses were 22 million yuan, down 7.61% from the same period last year; and financial expenses were 8 million yuan, an increase of 478.45% over the same period last year. The decline in sales expenses is mainly due to the gradual contraction of the retail business of Chengdu Hualian, a subsidiary, resulting in a sharp reduction in wages, utilities and other expenses compared with the same period last year; the sharp increase in financial expenses is mainly due to the increase in interest on bank loans due to new loans in the reporting period.

Consolidate the urban pipeline gas business and actively layout the field of LNG. In terms of urban pipeline gas business, the company currently has five gas subsidiaries, such as Shangrao Gas, Mineng Natural Gas and Luojiang Natural Gas, and the volume of urban gas business is growing steadily. In order to realize the guarantee of dual-source gas supply, the company has added LNG purchase and sales business since 2016. During the reporting period, the company seized the opportunity of strengthening pollution prevention and control efforts in the Beijing-Tianjin-Hebei region, on the one hand, strengthened cooperation with upstream gas source units and explored unconventional gas sources such as coalbed methane and wellhead gas, and on the other hand, began to pilot LNG business in key markets such as Beijing-Tianjin-Hebei and other key markets.

Sign another 360 million project with Sinnet, accelerating the promotion of distributed energy business. 1) the IDC project is very suitable for being distributed and has a broad prospect. Because the IDC project needs all-day cooling, the energy consumption structure matches the distributed thermoelectric load. According to the data of China's IDC circle, China's IDC market reached 37.22 billion yuan in 2014, a year-on-year growth rate of 41.8%. It is expected to maintain rapid growth in the next few years, giving rise to the demand for downstream distributed projects. 2) the company signed another 360 million project with Sinnet. Since 2016, when it cooperated with Sinnet to implement the Shanghai Jiading IDC data center distributed energy project with 18MW of total installed capacity, on April 29, the holding subsidiary Ruiheng Energy once again signed "Sinnet Yanjiao distributed Energy cooling, heating and Power Project Investment contract" and "Science and Technology Shengcai Taiheqiao distributed Energy cooling, heating and Power Project Investment contract". Ruiheng Energy plans to invest no more than 360 million yuan, of which the Yanjiao project will invest no more than 80 million yuan with a total installed capacity of 8MW, and the Taihe Bridge project will invest no more than 280 million yuan with a total installed capacity of about 26MW.

When the controlling shareholder buys gas assets, the pace of extension is accelerated. In order to promote the further development of the company's gas business, Jingxi Investment, which is invested by the controlling shareholder Datong Group, bought 99.99% each of Shenzhen Tianchen Shuanglian Investment Co., Ltd. and Shenzhen Xinjinzhu Investment and Development Co., Ltd. on the same day, 0.01% of each of the two target companies was acquired through equity acquisition. The main assets of the two underlying companies are the full equity of Beihai Pipeline Gas Co., Ltd. and Guangxi Pan-Bei Logistics Co., Ltd., among which Beihai Gas is one of the major urban gas companies in Beihai City, Guangxi, with a registered capital of 40 million. The main business is to operate the sales business of pipeline gas and bottled liquefied petroleum gas in the franchise area.

Investment advice: maintain the overweight rating. It is estimated that the company's net profit from 2017 to 2019 is 0.21,0.28 and 40 million yuan respectively, and the corresponding valuation level is 170,128,90 times. Maintain the overweight rating.

Risk hint: project progress is lower than expected and natural gas prices decline.