Events:

The company released the 2018 mid-term report that in the first half of 2018, the company achieved revenue of 4.285 billion yuan, an increase of 5.27% over the same period last year, and a net profit of 327 million yuan, an increase of 29.68% over the same period last year, in line with Shenwan Hongyuan's expectations. The growth of the company's performance is mainly due to the steady increase in the scale of gas sales.

Main points of investment:

The scale of gas sales in long-distance pipeline business has increased steadily, the expansion of urban gas business has accelerated, and the company's revenue has increased steadily. Since 2017, Shaanxi has vigorously promoted the iron fist action to control haze, and the consumption of natural gas in the province has increased steadily. 2018H1 achieved a total sales volume of 3.08 billion square meters of natural gas, an increase of 2.77 percent over the same period last year. In addition to the original long-distance pipeline business, the company expanded the urban combustion business in the province through participating holding companies and carried out urban gasification projects in 25 counties in 5 districts, covering more than 30 cities (districts) or their subordinate counties (districts), including Hanzhong City, with a coverage rate of 28.04% in the province. 2018H1 achieved 204 million square meters of gas sales in the urban gas pipeline network, an increase of 32.06% over the same period last year. The company's gas sales growth superimposed the rapid development of the urban gas business with higher terminal sales prices. In the first half of the year, the company's revenue increased by 5.27% over the same period last year. City Gas Development Co., Ltd., a subsidiary of the company, signed an agreement with the people's Government of Wuqi County to be fully responsible for the project of changing central heating coal to gas in Wuqi County. 2018H1 City Gas Development Co., Ltd. has obtained the 30-year franchise of Wugu Town, Baibao Town and other 8 towns in Wuqi County, and successfully developed the gasification project in Jiaodao Town, Fuxian County. Shangluo Company has realized the gas supply to Shanyang Deqingyuan Agricultural Technology Co., Ltd. The follow-up company's town gas business is expected to accelerate expansion and continue to contribute to performance increment.

The increase in the scale of gas sales has driven the increase in gross profit margin, the company's net profit has achieved high growth, and the reduction of management and transportation fees in the province in the second half of the year has affected the company's profit. Pipeline depreciation accounts for a relatively high proportion of the long-distance pipeline business costs. 2018H1 benefits from the increase in the scale of gas sales, and the depreciation cost per unit of gas sales has been reduced. The company's long-distance pipeline business achieved a gross profit margin of 13.58%, an increase of 2.5% over the same period last year. The profit of the company's main business increased steadily, and 2018H1 achieved a net profit of 327 million yuan, a substantial increase of 29.68% over the same period last year. Recently, the company announced that since June 10, 2018, the benchmark gate price of natural gas in Shaanxi Province has been reduced to 1.23 yuan per cubic meter (including tax) due to the adjustment of tax rate, while implementing the newly approved price of natural gas pipeline transportation in the province. The price of pipeline transportation in the province implemented by the company has been reduced, and the gross profit margin of the company's long-distance pipeline business is expected to decline in the second half of the year.

Natural gas supply is guaranteed through multiple channels, and the termination of non-public offerings will not affect the construction process of the fund-raising pipeline. Due to the large-scale gas shortage in the winter of 2018, Shaanxi Province implemented the work deployment of supply and demand and gas reform in 2018, and the company actively docked with upstream gas supply enterprises. organize to carry out 2018 natural gas purchase and sales contract and 2019 heating season contract signing. Up to now, the amount of resources for the whole year of 2018 has been implemented, and the company will also implement peak shaving gas resources through various channels such as signing winter peak supplementary agreements. In July 2018, the company announced the termination of a private share offering, but the fund-raising project is still going well. Up to now, all the construction of the gas pipeline project from Meixian to Longxian has been completed, and the tie line of the middle-Guizhou line is cooperating with the gas source unit to carry out all the preparatory work before it is put into operation. Jingxi first, second and third line contact lines, Shangluo to Shangnan, Shangluo to Luonan, Shangluo to Shanyang gas pipelines are being constructed on site as planned. Tongchuan township gasification project, Bikang Pharmaceutical Gas supply Line and other projects have been approved (for the record), and follow-up work is being carried out; preparatory work is being carried out for projects from Liuba to Fengxian and from Fuxian to Yichuan. At present, the company has put into operation the pipeline with an annual gas transmission capacity of 16.5 billion cubic meters. After the above pipeline is put into production, it will further improve the company's natural gas supply capacity.

Profit forecast and rating: taking into account the downward adjustment of management and transportation fees in Shaanxi Province, we downgrade the company's 18-20 net profit forecast. It is estimated that the company's 18-20 net profit will be 4.6,5.3 and 615 million yuan respectively (before the reduction is 5.31,5.84 and 634 million yuan respectively), and the current stock price corresponds to PE of 19, 16 and 14 times respectively. As the leader of Shaanxi pipe network, the company is expected to continue to benefit from the downstream consumption growth brought by "coal to gas" in the future, and maintain the "overweight" rating.