Key points of investment:
Shengli Co., Ltd. published its 2018 three-quarter report. In the first three quarters of 2018, the company achieved operating income of 3.150 billion yuan, an increase of 25.92% over the previous year; it achieved net profit of 903559 million yuan, an increase of 12.31% over the previous year. In terms of each share, the company achieved EPS of 0.10 yuan in the first three quarters, with a weighted average return on net assets of 4.07%. The increase in the company's revenue is mainly due to the continuous expansion and development of the company's natural gas business. The operating income of the natural gas business increased by 37.69% over the same period last year.
Sales expenses increased by nearly 70 million over the same period last year. In the first three quarters of 2018, the company incurred sales expenses of 176 million yuan, an increase of 67.11 million yuan over the previous year. According to the company's third quarterly report, the increase in sales expenses is mainly due to an increase in the operating income of the company's natural gas business, which has led to corresponding increases in labor costs, transportation costs, etc.
Endogenous growth: vigorously promote the “gas instead of coal” project. In the context of the country's promotion of “gas instead of coal” energy structure transformation, the company vigorously launched the “gas instead of coal” project, and the natural gas company “Village Connect” and “Town to Town Connect” businesses achieved rapid growth. In 2017, the construction of 896 villages was completed, connecting and installing 160,000 households. On February 13, 2018, the company announced that in order to achieve faster development of the natural gas business, the company plans to issue shares privately. The capital raised will mainly be used for the construction of “Village Connect”, “Town to Town Connect”, “Gas Storage Facility Project” and “Smart Gas System”.
Outreach development: Steadily promote natural gas mergers and acquisitions centered on urban management rights. In 2017, the company successfully achieved project cooperation with Wenzhou Shengli Gangyao Natural Gas Co., Ltd., Pengze County Natural Gas Co., Ltd., and Chongqing Shengbang Gas Co., Ltd., laying a good foundation for the company's subsequent development. On January 8, 2018, the board of directors of the company agreed to sign an “Equity Transfer Agreement” with Huayuan Company and its manager to transfer 100% of the shares of the new company held by Huayuan Company. The share transfer price was 663.8 million yuan. After the equity transfer is completed, the company will hold 100% of the shares in Chongqing Shengbang Gas Co., Ltd.
The natural gas industry is expected to continue to develop rapidly in the future. According to statistics from the National Development and Reform Commission, the apparent consumption of natural gas in China from January to August 2018 was 179.7 billion cubic meters, an increase of 19.4% over the previous year. We believe that the reform of the natural gas industry will drive the continuous and rapid development of downstream demand. It is expected that the annual growth rate of China's natural gas demand will remain above 15% in the next few years. Increased demand has led to continued rapid growth in upstream natural gas extraction, midstream piping, and downstream distribution.
Profit forecasts and investment ratings. We expect the EPS of Shengli Co., Ltd. from 2018 to 2020 to be 0.12, 0.14, and 0.16 yuan respectively. Considering that the company has just completed transformation, the natural gas business is developing rapidly through endogenous and epitaxial growth. According to 2018 BPS ($2.59) and 1.4-1.6 times PB, corresponding to a reasonable value range of $3.63-4.14, the “better than the market” investment rating was maintained.
Risk warning: demand for natural gas falls short of expectations; natural gas business development progress falls short of expectations, etc.
