Events:
The company disclosed its annual report for 2017 and its quarterly report for 2018. For the whole year of 2017, the company's operating income was 7.64 billion yuan (up 6.0% from the same period last year), its net profit was 395 million yuan (down 22.2% from the same period last year), and EPS was 0.36 yuan, in line with our expectations. The company plans to pay a cash dividend of 0.30 yuan per share (including tax). 2018Q1's operating income is 2.9 billion yuan (up 8.8% from the same period last year), its net profit is 314 million yuan (up 42.6% from the same period last year), and EPS is 0.28 yuan.
Comments:
The volume of long-distance pipeline business increases and prices decrease, and the volume and prices of urban gas business rise.
The company's main business includes long-distance pipeline and urban gas business, of which long-distance pipeline is the core business.
In 2017, the long-distance pipeline business accounted for 90.8% and 91.7% of the company's operating income and gross profit, respectively. In 2017, the company sold 5.59 billion cubic meters of natural gas (an increase of 7.2 percent over the same period last year), including 5.28 billion cubic meters of long-distance pipelines (6.8 percent year-on-year) and 300 million cubic meters of urban gas (14.7 percent year-on-year growth). The unit price of long-distance pipeline business excluding tax is 1.31 yuan / cubic meter (down 1.6% from the same period last year), and the cost of purchasing gas is 1.01 yuan / cubic meter (up 3.1% from the same period last year). The unit price of urban gas business excluding tax is 1.31 yuan / cubic meter (down 1.6% from the same period last year), and the cost of purchasing gas is 1.01 yuan / cubic meter (up 3.1% from the same period last year).
As a result of the above reasons, the company's revenue from long-term pipelines in 2017 increased by 5.1% compared with the same period last year, and gross profit decreased by 14.9%. The operating revenue of the city gas business increased by 16.0%, and gross profit increased by 29.8%.
The company's 2018Q1 net profit increased by 42.6% compared with the same period last year, mainly due to the low base of 2017Q1 performance due to price adjustment (222 million yuan, down 35.3% from the same period last year). We expect to maintain a relatively stable growth rate for the whole of 2018.
With the steady progress of natural gas price reform, the uncertainty of the company's profit change is expected to be eliminated.
The current round of natural gas price reform emphasizes "controlling the middle and opening up both ends", that is, strengthening the supervision of gas transmission and distribution costs and prices, and speeding up the liberalization of natural gas sources and sales prices. In December 2017, the Shaanxi Provincial Price Bureau issued the measures for the Management of Natural Gas Pipeline Transportation and Gas Distribution prices in Shaanxi Province (for trial implementation), pointing out that the permitted rate of return of pipeline transportation enterprises in the province is determined by 7% of the total investment rate after tax; the permitted rate of return of gas enterprises is determined by 6% of the total investment rate after tax. Affected by the downward management and transportation fees, the company's long-distance pipeline business unit gross margin and gross profit margin have continued to decline in recent years, dragging down the company's profits. It is expected that with the landing of natural gas price reform, the company's long-distance pipeline and urban gas business will enjoy stable income, and the uncertainty of profit changes will be eliminated.
The proportion of cash dividends exceeded expectations
The company focuses on shareholder returns, with dividends of more than 30 per cent in 2013-2016. According to the company's shareholder return Plan for the next three years (2016-2018), the annual profit distributed by the company in the form of cash is not less than 10% of the distributable profits realized in that year, and the cumulative profit distributed in cash in the company's three consecutive fiscal years is not less than 30% of the average annual distributable profits realized in those three years. In 2017, the company plans to pay a cash dividend of 0.30 yuan per share (including tax), with a cash dividend rate of 82.3%, which is much higher than expected. At the closing price of 2018-04-16, the corresponding dividend yield is 4.3 per cent.
The application for non-public offering of shares has been approved by the CSRC, and the scale of the natural gas pipeline network has been further increased.
In February 2018, the company's application for a non-public offering of shares was approved by the CSRC, and the funds raised will be mainly used for the construction of natural gas pipelines in the province. After the fund-raising investment project is gradually put into production, the length of the company's long-distance pipeline will increase by more than 488 kilometers, the annual gas transmission capacity will increase by 1 billion square meters, and the scale of pipe network coverage will be further expanded, thus boosting the growth of natural gas sales.
Earnings forecast, valuation and rating
According to the company's business plan and project progress, we have lowered the company's EPS to 0.40,0.46 yuan in 2018 and 2019 (originally predicted to be 0.43,0.48 yuan). It is estimated that the company's EPS in 2020 will be 0.56 yuan, corresponding to 17,15,12 times of PE in 2018-2020. Maintain the target price of 8.17 yuan, corresponding to 2018 17 times PE, maintain the "overweight" rating.
Risk Tips:
Price risk: the risk of the company's natural gas pipeline transportation and distribution fees falling further; sales risk: the risk that the lower-than-expected downstream demand for natural gas leads to a lower-than-expected growth rate of natural gas sales
Project schedule risk: the company's natural gas pipeline construction progress is lower than expected, the non-public offering project progress is slower than expected risk and so on.
