Key points of investment:
Shengli Co., Ltd. published its report for the third quarter of 2017. In the first three quarters of 2017, the company achieved operating income of 2,501 million yuan, an increase of 41.99% over the previous year; it achieved net profit of 804.5547 million yuan, an increase of 312.57% over the previous year. Among them, the company achieved revenue of 854 million yuan in a single quarter in 2017 Q3, an increase of 49.57% over the previous year; it achieved net profit of 378.9976 million yuan, a sharp increase of 3569.83% over the previous year. The sharp increase in the company's performance in the first three quarters was mainly due to increased revenue from the stock natural gas business, mergers and acquisitions of incremental gas companies, and the completion of the divestment of the high-loss agrochemical business. Among them, revenue from the natural gas business increased 94% year on year, and the gas pipeline manufacturing business increased 92% year on year.
The natural gas industry is expected to develop rapidly in the future. In 2016, China consumed 205.8 billion cubic meters of natural gas, accounting for only 6% of primary energy. There is still a big gap with the world average of 24%. As a clean energy source, relevant policies to promote the development of the natural gas industry have been intensively introduced in China in recent years. According to the 13th Five-Year Plan, China's natural gas consumption will reach nearly 350 billion cubic meters by 2020, with a compound growth rate of 14%. At the same time, the market-based reform process of the industry centered on “controlling the middle and liberalizing the two ends” is also advancing at an accelerated pace, which will help rationalize natural gas prices and further stimulate consumption growth.
The industrial transformation was completed, and the natural gas business became the company's main source of revenue. In 2016, the company completed its exit from the agrochemical business and accelerated the pace of strategic transformation, and the natural gas business continued to grow rapidly. In the first half of 2017, the path of mergers and acquisitions continued to expand the scale and benefits of the main industries. In the first half of the year, the company's natural gas business revenue was 1,144 million yuan, and the gas pipeline manufacturing business was 438 million yuan. Together, the two businesses accounted for 96.0% of total revenue and 95.8% of total gross profit.
Actively carry out epitaxial mergers and acquisitions to expand the natural gas business. Since the company's transformation, it has actively expanded the company's natural gas business through both endogenous and epitaxial methods. The company plans to acquire Wenzhou Shengli Gangyao Natural Gas Company and Pengze County Natural Gas Company, and also plans to participate in the bankruptcy and restructuring of Chongqing Huayuan Natural Gas Co., Ltd. to further improve the layout of the city gas business in the Jiangzhe and Chongqing regions in the form of cooperative development. At present, the company has launched natural gas business in Jinan, Dongying, Qingdao and other places in Shandong.
Use terminal resources to develop automobile charging and switching business. In order to develop the new energy business, Shengli Co., Ltd. signed a “Strategic Cooperation Agreement” with Qingdao Terude to jointly promote strategic cooperation in the field of vehicle charging. The current partnership began with terminal fields such as gas stations owned by Shengli Co., Ltd. to promote new energy vehicle charging business cooperation. We believe that through this strategic partnership, the company will enter the automotive charging and switching field, use the existing market terminal network to build a multi-level new energy supply system, and open up new business growth points.
Profit forecasts and investment ratings. We expect the EPS of Shengli Co., Ltd. to be 0.13, 0.29, and 0.32 yuan respectively from 2017 to 2019, and the BPS is expected to be 2.54 yuan by the end of 2017. Considering the completion of the company's transformation, the natural gas business is in a period of rapid development. According to BPS in 2017 and a net market ratio of 3.5 times, we gave the company a target price of 8.89 yuan to maintain an “increase in holdings” investment rating.
Risk warning: Demand for natural gas fell short of expectations; development of the natural gas business fell short of expectations.
