Key points of investment:
Competitive gas companies in South China
The company is mainly engaged in urban gas business. Its main business is the sale and distribution of natural gas, gas engineering design and construction. The company's main business area is located in Foshan City, Guangdong Province. It has exclusive franchise rights to uniformly receive all pipeline natural gas entering the Foshan region; it is also actively developing gas business in the surrounding area of Foshan, and has obtained exclusive pipeline gas franchises in Nanxiong City and Gaoyao District of Zhaoqing City respectively. At present, the company has built and put into use more than 2,000 kilometers of urban gas pipelines, providing pipeline gas services to 643,000 residential users and 3,095 industrial and commercial enterprises; 9 gas vehicle filling stations have been built, serving nearly 5,000 vehicles.
Fundraising projects enhance profitability
The capital raised this time is mainly invested in the Foshan Natural Gas High Pressure Pipeline Network Phase III Project, the Foshan Sanshui District Natural Gas Utilization Phase II Project, and the Gaoyao Pipeline Natural Gas Project Phase II Project.
After the fundraising project is completed and produced, the company will supply 1,117 billion cubic meters of gas to residents, public service, and industrial and commercial users, which will further expand the company's gas supply area, which will help the company expand its market size, enhance its market competitiveness, and enhance the company's profitability.
Profit forecasting
According to the progress of fund-raising project construction, we expect net profit attributable to parent companies in 2017 and 2018 to be 354 million yuan and 415 million yuan respectively, with year-on-year growth rates of 5.10% and 17.10% respectively. The corresponding diluted earnings per share were 0.64 yuan and 0.75 yuan.
Pricing Conclusions
The total share capital of the company before the issuance was 50 million shares. The proposed issuance this time will not exceed 56 million shares, not more than 10.07% of the company's total share capital after issuance. The company's issue price is 13.94 yuan/share. We believe that the reasonable valuation price given to the company was 25.49-31.86 yuan, corresponding to a price-earnings ratio of 40-50 times the earnings per share in 2017.
risk factors
The risk that pipeline gas pricing policies are regulated by price authorities
According to the “Certain Opinions of the CPC Central Committee and the State Council on Promoting Price Mechanism Reform” (China Development [2015] No. 28), in the future, gas price reform will be promoted in accordance with the general idea of “control the middle and let go of the two ends”, promote diversified competition among market players, properly handle and gradually reduce cross-subsidies, and restore their commodity attributes. Fully rationalize natural gas prices as soon as possible, and speed up the liberalization of gas sources and sales prices of natural gas.
According to (Guangdong Price [2012] No. 266), urban pipeline gas sales prices are authorized to be set and adjusted by the municipal and county people's governments. The distribution prices, residential gas prices, utility gas prices, industrial and commercial gas prices and related service prices of urban pipeline gas enterprises are authorized to be set and adjusted by the municipal and county people's governments and reported to the competent price department of the Guangdong Provincial People's Government for the record.
The company's main business area is in Foshan, Guangdong Province, and complies with regulations such as the “Administrative Measures of the Guangdong Provincial Bureau of Commodity Prices on Pipeline Gas Prices (Trial)”, the “Notice of the Foshan Municipal Bureau of Commodity Prices on Adjusting the Sales Price of Pipeline Natural Gas to Residents and Establishing Other Gas Pricing Mechanisms”, and “Approval on Issues Related to High-pressure Pipeline Pipeline Pipeline Gas Transmission and Distribution Prices”. The above documents generally reflect the implementation of tiered gas prices for gas supply to residents, and that prices remain generally stable; industrial and commercial users implement a dynamic adjustment mechanism in which gas purchase costs are linked to the maximum price in the same direction. Judging from the company's operation, the overall level of cost profit margin is controlled within a certain range. However, if the relevant government departments make adjustments to the sales price, pricing policy, or pricing mechanism of natural gas in the future, causing the company's profit margins to be compressed, or if the price authorities fail to synchronize and fully coordinate changes in gas source prices in a timely manner, there will be adverse changes to the company, which may adversely affect the operation and economic efficiency of the company's pipeline gas business.
The risk of supplier concentration
The company's natural gas procurement mainly comes from companies such as Guangdong Dapeng, CNOOC, Gas and Power, and CNPC. The total supply of these long-term gas sources accounted for about 91%, 93%, 87%, and 85% of the total natural gas procurement volume in that year, respectively. On the one hand, it ensured that the company was able to obtain long-term and relatively stable gas supply guarantees, and on the other hand, it also became highly dependent on a small number of suppliers to a certain extent.
During the reporting period, the company's total purchases of natural gas from the top five suppliers accounted for 94.35%, 97.90%, 90.17%, and 90.26% of total natural gas purchases during the same period, respectively. This is mainly closely related to the characteristics of China's upstream and downstream gas industry chains. Currently, China's upstream natural gas exploration and development and midstream transportation and distribution links are highly concentrated in the hands of the three major state-owned oil companies of CNPC, Sinopec, and CNOOC. The three major companies account for more than 95% of the country's domestic natural gas production, imported natural gas accounts for more than 80% of the country's total imports, and supply accounts for about 90% of the domestic natural gas market share.
Although urban gas is in the priority order of natural gas utilization, as China's overall demand for natural gas continues to grow, if the supply of upstream natural gas suppliers is drastically reduced, a major accident occurs during production and operation, or other force majeure factors occur, and the supply of natural gas cannot be guaranteed in accordance with the contract, it will have a significant adverse impact on the company's operations in the short term.
There is a risk that Guangdong Dapeng Company may reduce the company's long-term contract gas supply due to upstream suppliers and other reasons
The company's holding subsidiary High Pressure Pipeline Network Company signed a long-term procurement contract with Guangdong Dapeng for a period of 25 years (from 2006 to 2031) with a cumulative purchase volume of about 3.7 million tons of natural gas, with an annual supply of about 170,000 tons during the stable production period. The proportion of Guangdong Dapeng Phase I contract natural gas purchased by the company during the reporting period was about 22%, 18%, 18% and 21% of the total gas procurement volume of each year, respectively. The purchase unit prices were 1.37 yuan/cubic meter, 1.34 yuan/cubic meter, 1.32 yuan/cubic meter, and 1.26 yuan/cubic meter respectively, which is the lowest purchase price among the natural gas sources currently purchased by the company. Guangdong Dapeng Company, on the other hand, signed a 25-year “LNG Sales and Purchase Agreement” with six Australian parties (hereinafter referred to as the “Australian Party”). In recent years, the natural gas market price has been significantly higher than the purchase price of Guangdong Dapeng Company. Since 2011, Australia has used bad weather such as typhoons, power system failures caused by unplanned production line shutdowns, transformer failures or power outages at loading ports, liquefied line shutdowns, and high temperature effects. The high pressure network company was also affected by this and failed to obtain the full amount of Guangdong Dapeng Natural Gas in the first phase of the contract as agreed in the contract.. The average annual supply reduction ratio of Guangdong Dapeng to high pressure pipe network companies in 2014-2016 was 5.50%, and the impact of the supply reduction was limited.
Although the company has now strengthened diversification of natural gas supply channels and channels, such as purchasing Western gas from CNPC and purchasing offshore gas from CNOOC to strengthen the long-term supply of natural gas, and procuring truck-mounted zero gas in the spot LNG market to supplement the short-term supply of natural gas. However, if in the end the two parties fail to settle amicably, or if they resort to legal procedures and decide that Australia wins, it may cause the company's Guangdong Dapeng Phase I gas contract to face the risk of termination, or decide that Australia can only reduce gas supply or raise gas supply prices, which will adversely affect the company's natural gas purchases or the company's operating performance.
Risk of fluctuations in natural gas purchase prices
As the reform of the market-based mechanism of natural gas prices progresses, there are many uncertain factors affecting natural gas purchase prices in the future, and it may not be possible to accurately predict them in the short term, and natural gas purchase prices may fluctuate greatly. Although the relevant natural gas price policy already stipulates the establishment of a linkage mechanism between gas purchase costs and urban pipeline gas sales prices, if the price of natural gas rises too high, exceeds the user's affordability, or does not have a comparative comprehensive advantage compared to alternative energy, some end users may choose other alternative energy sources, such as liquefied petroleum gas, diesel, etc., which may affect the stability of the company's future performance growth.
Risks affected by the level of economic development, business base, and urbanization process in the region where the business is carried out
The operation and development of urban gas enterprises is greatly influenced by the urbanization process, the level of economic development, and the industrial and commercial base of their franchise areas. The pipeline gas franchise areas of the company and its holding subsidiaries mainly include areas such as Foshan City, Nanxiong City, Gaoyao District of Zhaoqing City, and Foshan (Yunfu) Industrial Transfer Industrial Park in Guangdong Province. The Foshan region accounted for 97% of the company's main business revenue in 2016. At present, China's economic development has entered a new normal. It is in the context of eliminating excess capacity and adjusting the industrial structure. Overall, the economic growth rate is showing a shift in gears, falling from double-digit growth in the past to single-digit growth. In the future, if the economic development of the company's main operating regions does not continue to grow, or if economic growth slows down significantly, or the urbanization process stagnates, it may also adversely affect the growth of the company's main business or operating performance.
Risk of disposal of project assets arising during the expiry of a franchise
During the franchise period, based on the principle of “who invests and who owns”, the company owns the assets such as the pipeline and gas facilities invested and built, but when the franchise period expires, the company must hand over the project assets during the franchise period to the relevant government departments and receive compensation based on the asset evaluation results. As an important asset for urban gas companies, the transfer of natural gas pipelines and related facilities may have an adverse impact on the company's pipeline gas operations.