Key points of investment:
Shengli Co., Ltd. published its 2017 annual report. In 2017, the company achieved operating income of 3.828 billion yuan, an increase of 44.46% over the previous year; it achieved net profit of 62.3025 million yuan, an increase of 121.29% over the previous year. The sharp increase in the company's performance was mainly due to the continuous expansion and development of the company's natural gas business through mergers and acquisitions and the improvement of the quality of operations. In 2017, the company's natural gas business revenue was 2,568 million yuan, an increase of 96.26% over the previous year; the revenue of the gas pipeline manufacturing business was 691 million yuan, an increase of 82.65% over the previous year.
The strategic transformation was achieved, and the natural gas business became the leading industry. In 2017, the company continued to promote the in-depth development of the clean energy and natural gas industry. The scale of operation and profitability continued to increase, and achieved the strategic transformation of the natural gas industry. Currently, the clean energy industry has become the company's leading industry. In 2017, the gross margins of the company's natural gas business and gas pipeline manufacturing were 14.79% (down 3.12 percentage points year on year) and 22.66% (up 0.17 percentage points year on year), respectively, and gross profit accounted for 67% and 28% respectively.
Endogenous growth: vigorously promote the “gas instead of coal” project. In the context of the country's promotion of “gas instead of coal” energy structure transformation, the company vigorously launched the “gas instead of coal” project, and the natural gas company “Village Connect” and “Town to Town Connect” businesses achieved rapid growth. In 2017, construction of 896 villages was completed, connecting and installing 160,000 households. On February 13, 2018, the company announced that in order to achieve faster development of the natural gas business, the company plans to issue shares privately. The capital raised will mainly be used for the construction of “Village Connect”, “Town to Town Connect”, “Gas Storage Facility Project” and “Smart Gas System”.
Outreach development: Steadily promote natural gas mergers and acquisitions centered on urban management rights. In 2017, the company successfully achieved project cooperation with Wenzhou Shengli Gangyao Natural Gas Co., Ltd., Pengze County Natural Gas Co., Ltd., and Chongqing Shengbang Gas Co., Ltd. On January 8, 2018, the board of directors of the company agreed to sign an “Equity Transfer Agreement” with Huayuan Company and its manager to transfer 100% of the shares of the new company held by Huayuan Company. The share transfer price was 663.8 million yuan. After the equity transfer is completed, the company will hold 100% of the shares in Chongqing Shengbang Gas Co., Ltd., and the company's clean energy business will be further extended to the southwest market.
The natural gas industry is expected to continue to develop rapidly in the future. According to data from the National Development and Reform Commission, the country's apparent consumption of natural gas in 2017 was 237.3 billion cubic meters, an increase of 15.31% over the previous year. We believe that the reform of the natural gas industry will drive the continuous and rapid development of downstream demand. It is expected that the annual growth rate of China's natural gas demand will remain above 10% in the next few years. Demand growth has led to continued rapid growth in upstream extraction, midstream piping and downstream distribution of natural gas.
Profit forecasts and investment ratings. We expect the EPS of Shengli Co., Ltd. to be 0.17, 0.23, and 0.31 yuan respectively from 2018 to 2020, and the BPS for 2018 is expected to be 2.64 yuan. Considering that the company has just completed transformation, the natural gas business is in a period of rapid development through endogenous and epitaxial growth. Based on 2018 BPS and 2.5 times PB, we gave the company a target price of 6.60 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.
