Incidents: 1) The company released its 2018 semi-annual report, achieving revenue of 2.38 billion yuan in the first half of the year, an increase of 17.4% over the previous year; Guimu's net profit was 240 million yuan, an increase of 22.6% over the previous year; 2) The company plans to develop gas power generation cooperation with Datang International Power Generation Guangdong Branch and Huadian Group Guangdong Branch.
The gas sales volume continued to grow, and the performance was good. By the end of June 2018, the company had accumulated more than 730,000 users. In the first half of 2018, it expanded more than 40,000 new residential users, 137 new industrial users, and 229 commercial users. The company sold 794 million cubic meters of natural gas in the first half of 2018, up 19.96% year on year; managed transportation volume was 61 million cubic meters, up 35.95% year on year; cumulative natural gas supply was 855 million cubic meters, up 20.97% year on year. It led to natural gas sales revenue of 2,258 billion yuan, an increase of 18.83% over the previous year.
Looking at the breakdown, pipeline gas sales in Foshan were 743 million cubic meters, an increase of 19.53% over the previous year; pipeline gas sales outside of Foshan were 337 million cubic meters, an increase of 65.65% over the previous year; industrial users sold 521 million cubic meters of natural gas, accounting for 65.6%, an increase of 20.73% over the previous year; in-depth development by industrial users promoted continuous growth in natural gas sales.
Profitability is stable and cash flow is plentiful. The company's gross profit margin in the first half of 2018 was 21.37%, a slight decrease of 0.63 percentage points from the previous year. The cost rate for the period was 5.86%, an improvement of 0.25 percentage points over the previous year, and profitability remained stable. The company's net operating cash flow in the first half of 2018 was 4.2 billion yuan, an increase of 63.4% over the previous year, 1.75 times net profit, and the cash flow was abundant.
The region where it is located has well-developed industries and sufficient momentum for continued growth. The company has sufficient gas resources and has an exclusive franchise to uniformly receive all pipeline gas entering the Foshan region. It owns gas supply licensing rights for 4 out of 5 urban areas in Foshan. The gross industrial product of Foshan in 2017 was about 2.24 trillion yuan, and it continues to rank among the largest and medium-sized cities in the country. The secondary sector accounts for about 60% of the national economy. It has industrial clusters with regional advantages such as home appliances, ceramics, aluminum profiles, etc., and is the largest comprehensive ceramic production base and export base for ceramic products in China. The industry is well developed. Ceramics, aluminum profiles, hardware, etc. are all energy-intensive industries. Currently, natural gas is gradually being used and promoted, and gas consumption demand continues to increase. According to the “Foshan Energy Medium- and Long-Term Energy Plan (2010-2020)”, the city's total natural gas consumption target in 2020 is 3 billion square meters. Compared with the natural gas consumption of about 1.4 billion square meters in 2017, there is plenty of room for natural gas consumption. The company continues to explore gas consumption potential in Foshan and expand industrial users. It plans to develop gas power generation cooperation with Datang International and Huadian Group in the near future, which is expected to further drive the company's gas sales growth after implementation. Furthermore, outside of Foshan, the company has exclusive franchise rights for pipeline gas in Enping City, Nanxiong City, Gaoyao District of Zhaoqing City, and Foshan (Yunfu) Industrial Transfer Industrial Park. In the first half of 2018, the company established Huazhaoneng Investment Company to invest in offsite urban gas and related projects. Out-of-market development is also expected to achieve certain results, and there is sufficient momentum for continued growth.
Profit forecasts and ratings. EPS is expected to be 0.76 yuan, 0.92 yuan, and 1.09 yuan respectively in 2018-2020, corresponding to PE 27 times, 23 times, and 19 times. The company's performance is steady and continues to grow. Maintain an “increase in holdings” rating.
Risk warning: The risk of customer expansion falling short of expectations, and a sharp reduction in price spreads brings the risk of declining profit margins.