Dynamic event

The company released its annual performance report for 2017. In 2017, the company's operating income was 7.643 billion yuan, an increase of 6.00% over the same period last year; the net profit attributed to the owner of the parent company was 395 million yuan, down 22.24% from the same period last year; and basic earnings per share was 0.36 yuan. It is proposed to send 3 yuan to 10 people in 2017.

Release the first quarter 2018 results report. In the first quarter, the company's operating income was 2.897 billion yuan, an increase of 8.84% over the same period last year; the net profit belonging to the owner of the parent company was 314 million yuan, an increase of 42.60% over the same period last year; and basic earnings per share was 0.28 yuan. The company expects to achieve a net profit of 277 million yuan to 378 million yuan in the first half of 2018, an increase of 10% 50% over the same period last year.

Main viewpoints

The increase of gas sales promotes the rise of income.

In 2017, the company sold 5.585 billion cubic meters of natural gas, an increase of 7.20% over the same period last year. Of these, the gas sales of long-distance pipelines were 5.284 billion cubic meters, an increase of 6.81 percent over the same period last year, while those of urban gas pipelines were 302 million cubic meters, an increase of 14.74 percent over the same period last year. In 2017, the company's total operating income reached 7.643 billion yuan, an increase of 6.00% over the same period last year. In the first quarter of 2018, the company's operating income increased by 8.84% compared with the same period last year, and net profit increased by 42.60%, mainly due to the growth of the company's gas sales volume and changes in gas sales structure.

A slight drop in gross profit margin

In 2017, the company's gross profit margin was 10.24%, down 2.16 percentage points from the same period last year.

Of this total, the gross profit margin of the natural gas sales business was 9.22%, down 2.53% from the same period last year; and the gross profit margin of the gasification project installation business was 57.34%, an increase of 17.92% over the same period last year.

As the revenue from natural gas sales accounts for 97.85%, the company's comprehensive gross profit margin has declined. Due to the continuous reduction in management and transportation fees, the company's gross profit margin has declined in recent years.

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 is determined by 7% of the total investment rate after tax; the permitted rate of return of gas distribution enterprises is determined by 6% of the total investment rate after tax.

It is expected that with the determination of gas transmission and distribution prices, the company's pipe transportation fees will tend to be stable.

Encourage clean energy and control coal consumption

The 13th five-year Plan for Energy Development proposes to gradually cultivate natural gas into one of the main sources of energy in China's modern clean energy system. By 2020, natural gas will account for 10% of the primary energy consumption structure, and by 2030, we will strive to increase the proportion of natural gas in primary energy consumption to 15%.

At the same time, Shaanxi Province has actively promoted the "gasification of Shaanxi" in recent years, encouraged the use of clean energy such as natural gas, and controlled the total consumption of coal. In the future, areas that traditionally rely heavily on coal, such as heating and power generation, will enter a continuous process of clean energy substitution, thus increasing the demand for natural gas consumption.

Risk hint

Customer development progress is lower than expected, pipe transportation fee decline risk, gas sales are lower than expected, and so on.

Investment advice:

Maintain a "cautiously overweight" rating over the next six months.

We predict that the company's operating income will grow by 9.68% and 7.20% respectively from 2018 to 2019, and the net profit attributed to the parent company will increase by 16.20% and 12.82% annually. The corresponding diluted earnings per share will be 0.41 yuan and 0.47 yuan, and the corresponding dynamic price-to-earnings ratio is 16.80 times and 14.89 times, respectively. The valuation of the company is lower than the industry average. We believe that the company occupies a regional monopoly in the field of long-distance natural gas supply in Shaanxi Province, and the company's performance will be improved with the growth of natural gas consumption. Maintain the company's "cautiously overweight" rating.