China's natural gas consumption will maintain a compound growth rate of more than 10% in the next few years; the company has successfully transformed the natural gas industry and will continue to expand and strengthen the natural gas industry with the strategic idea of “capital operation+industrial operation”. It is exploring multi-level upstream gas sources, developing an integrated natural gas industry chain, and ushering in a performance release period.
Transformed into a clean energy provider, the natural gas business ushered in major development. The company has successfully achieved a strategic transformation of natural gas; in recent years, it has acquired 13 downstream natural gas companies and gradually divested inefficient traditional industries; in 2017, the company's natural gas business accounted for about 70% of revenue and gross profit. The company has vigorously carried out the “gas instead of coal” project, and the natural gas company “Village Connect” and “Town to Town Connect” have achieved rapid growth. It is exploring multi-level, low-cost gas source supply systems such as imported LNG from overseas, coking gas clean energy, shale gas, etc., and developing an integrated natural gas industry chain.
China's demand for natural gas is growing rapidly, and there is great potential for development. In 2016, China's natural gas consumption accounted for only 6.2% of primary energy consumption, far below the global average of 24.13%. According to China's “13th Five-Year Plan for Natural Gas Development”, this ratio will reach 8.3-10% by 2020. The compound growth rate of China's natural gas consumption in the past 10 years was 13.41%. In 2017, China's natural gas consumption was 239.4 billion cubic meters, an increase of 14.71% over the previous year. It is expected that the growth rate of China's natural gas consumption will still maintain a growth rate of 10% to 15% in the next few years. In the downstream consumer sector, urban gas, natural gas power generation, and industrial fuels all have a lot of room for development.
The company's natural gas mergers and acquisitions projects are of high quality, and there is great potential for future profit growth. The company has steadily promoted natural gas acquisitions and mergers centered on urban management rights; in recent years, it has acquired 13 downstream natural gas companies, most of which have been very successful, such as the acquisition of Bazhou Shengli Shunda Natural Gas and Dongtai Gas. We expect the company's natural gas business profits to improve dramatically in 2018. Chongqing Shengbang Natural Gas began merging in 2018. Pengze Natural Gas and Wenzhou Shengli Port Yao can contribute to full-year profits; the contribution to natural gas business performance in 2018 is expected to exceed 200 million yuan.
Benefiting from the major development of natural gas, the company's gas pipeline business has seen a high level of profit growth. 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 development of the company's PE pipeline business.
Maintain a “Highly Recommended - A” investment rating. The company's natural gas business began to experience performance release this year. We expect the company's net profit attributable to the parent company from 2018 to 2020 to be 240 million, 351 million and 462 million yuan respectively. 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 579 yuan, PE is 21.2 times, 14.5 times and 11.0 times respectively, and the target price is 7.0 to 8.0 yuan, maintaining the “Highly Recommended - A” rating.
