Incidents:
The company released its 2018 quarterly report. During the reporting period, it achieved operating income of 1,045 million yuan, an increase of 36.15% over the previous year, and achieved net profit attributable to listed companies of 32.96 million yuan, an increase of 36.10% over the previous year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 3261 yuan, an increase of 31.55% over the previous year, achieving 0.04 yuan per share of EPS.
Comments:
1. The company's transformation into natural gas has achieved remarkable results, and revenue and net profit have grown rapidly
2018Q1's operating income and net profit increased by 36.15% and 36.10%, respectively, and basically maintained simultaneous rapid growth, mainly due to the growth of the company's natural gas business. In September 2017, 55% of the shares of Wenzhou Shengli Gangyao Natural Gas Company and 85% of Pengze Natural Gas Co., Ltd. were acquired respectively, and at the end of January 2018, the company acquired 100% of the shares of Chongqing Shengbang Gas Co., Ltd. The merger of these three companies led to an increase in the company's revenue. At the same time, with the rapid advancement of China's “coal to gas” in 2017, the company's previously acquired natural gas business revenue also grew steadily; the company's revenue increased 36.15% under the influence of two factors.
In addition, during the reporting period, the company calculated asset impairment losses of 9.01 million yuan, which affected part of its net profit.
2. The company's gross margin increased, and the cost ratio increased slightly during the period
The gross profit margin of 2018Q1 company was 17.2%, up 1.16 pct from the previous year and 3.97 pct from the previous month. The increase in the company's gross margin was due to the adjustment of the business structure. The share of natural gas business with high gross margin increased, while the share of trade business with low gross margin declined.
The 2018Q1 company's sales expense ratio, management expense ratio, and financial expense ratio were 5.05%, 2.48%, and 1.72%, respectively. The year-on-year increase was 0.96pct, -0.16pct, and 0.58pct respectively. The overall outlook was steady and slightly higher.
3. The company's natural gas mergers and acquisitions projects are of high quality and have great potential for future profit growth
In the second half of 2011, the company began a strategic transformation, entered the natural gas industry, and gradually divested inefficient traditional industries to achieve the transformation of the company from diversified traditional industries to specialized clean energy. In 2017, the company's natural gas business accounted for about 70% of revenue and gross profit, and the transformation results were remarkable.
Since the second half of 2011, the company has acquired 14 downstream natural gas companies. Most of these acquisitions have been extremely successful, such as Bazhou Shengli Shunda Natural Gas and Dongtai Gas. In 2018, Chongqing Shengbang Natural Gas began a merger. Pengze Natural Gas and Wenzhou Shengli Gangyao can contribute to full-year profits. It is expected that the profit of the natural gas business will continue to improve dramatically. We expect the company's natural gas business performance to contribute more than 200 million yuan in 2018.
4. Benefiting from the great development of natural gas in China, the company's gas pipeline business has grown profitably
With the commissioning of Chongqing Shengbang Plastic, the company's PE pipeline production capacity reached 120,000 tons/year. In 2017, the company's pipeline business achieved revenue of 679 million yuan, an increase of 99.7% over the previous year, and achieved net profit of 53.99 million yuan, a sharp increase of 273.1% over the previous year. As “Muramura Street” and “coal to gas” continue to advance, we are optimistic about the profitability of the company's PE pipeline business.
5. Investment advice
After more than 7 years of strategic transformation, the company's natural gas business accounts for nearly 70% of its revenue. In the future, the company will mainly include two businesses, namely the natural gas business and the natural gas plastic pipeline business.
The company's main performance increase in 2018 came from the merger of the acquisition of Chongqing Shengbang Gas. Pengze Natural Gas Company and Wenzhou Shengli Gangyao Natural Gas Company could contribute to full-year profits in 2018; the increase in performance brought about by Chongqing Shengbang Plastics after it was put into operation, and organic growth from other gas companies.
We expect the company's net profit from 2018 to 2020 to be 2,40, 3.51 and 462 million yuan respectively, and the EPS from 2018 to 2020 will be 0.27 yuan, 0.40 yuan, and 0.52 yuan respectively. Corresponding to the current stock price of 5.70 yuan, PE will be 20.9 times, 14.3 times, and 10.9 times, respectively, with a target price of 7 to 8 yuan, covered for the first time, giving it a “Highly Recommended - A” rating.
6. Risk warning
The risk of merger and acquisition asset integration falling short of expectations, the risk of insufficient gas supply during gas shortages, and the risk that the progress of outbound mergers and acquisitions did not meet expectations.
