Event: Shaanxi Natural Gas released its 2018 semi-annual report. 2018H1's operating income was 4.29 billion yuan, an increase of 5.3% over the same period last year, and its net profit was 330 million yuan, an increase of 29.7% over the same period last year.
The company's 2018H1 performance benefited from the growth of long-distance pipeline business: the company ploughed the long-distance natural gas pipeline business in the province. The operating income and gross profit of 2018H1's long-distance pipeline business were 3.87 billion yuan and 52.5 billion yuan respectively, accounting for 90.2% and 93.9% of the operating income and gross profit respectively, up 3.9% and 27.3% respectively over the same period last year. The gross profit margin of 2018H1's long-distance pipeline business was 13.6%, an increase of 2.5% over the same period last year. Driven by the long-distance pipeline business, 2018H1's gross profit was 55.9 billion yuan, an increase of 25.3% over the same period last year, and the comprehensive gross profit margin was 13.0%, an increase of 2.1% over the same period last year.
The growth rate of 2018Q2 performance has slowed, and profitability has declined compared with the previous quarter: on a quarterly basis, the company's 2018Q2 operating income and homing net profit grew by 5.3% and 29.7% respectively, which was 3.6% and 12.9% lower than that of 2018Q1. 2018Q2's gross profit margin and net profit margin were 7.1% and 0.9%, respectively, down 8.8% and 10.1% compared with 2018Q1. We believe that the main reasons are: (1) the decline of natural gas consumption capacity after the northern heating season; (2) since 2018-06-10, the downward adjustment of natural gas pipeline transportation prices in Shaanxi Province has dragged down the company's profit quality.
The natural gas price reform in Shaanxi Province has been accelerated, and the company's long-distance pipeline business has been negatively affected: the natural gas price reform in Shaanxi Province has been accelerated in 2018, and the company's core long-distance pipeline business belongs to the category of price control. 2018-06-11 company announcement shows that according to the requirements of the notice of Shaanxi Price Bureau on issues related to Natural Gas prices in our Province (Shaanxi Price Merchants (2018) No. 54), the company has adjusted the purchase and sales prices of natural gas accordingly since June 10, 2018. the company's net profit is expected to decrease by 170 million yuan in 2018. With the approval and implementation of pipeline transportation fees, the company's profits will benefit more from the growth of natural gas sales.
Profit forecast and investment rating: we adjust the profit forecast according to the company's project promotion and management and transportation fee adjustment. It is estimated that the company's EPS for 2018-2020 will be 0.39,0.44,0.53 yuan respectively (before adjustment is 0.40,0.46,0.56 yuan respectively), corresponding to 20,18 and 15 times PE for 2018-2020 respectively. Maintain the target price of 8.17 yuan, corresponding to 2018 21 times PE, maintain the "overweight" rating.
Risk hints: the risk of further downward gas pipeline transportation and distribution fees; the risk that the lower-than-expected downstream demand for natural gas leads to lower-than-expected growth of natural gas sales; and the lower-than-expected progress of the company's natural gas pipeline construction.
