Incident Baichuan Energy released its 2018 annual report Baichuan Energy achieved operating income of 4.753 billion yuan for the full year of 2018, an increase of 1,781 billion yuan over the same period of the previous year, an increase of 59.90%; net profit attributable to shareholders of listed companies was 1,006 billion yuan, an increase of 17.29% over the previous year, corresponding to EPS of 0.98 yuan. The company's weighted average ROE in 2018 was 24.16%, down 7.97 percentage points from 2017. A brief review of both gas sales and connectivity increased the company's performance by 17.06%. Driven by the Beijing-Tianjin-Hebei “coal-to-gas” and the transformation of the national energy structure, the company achieved significant growth in natural gas sales and number of connected households, thus boosting the company's revenue level to a sharp increase of 59.90%, and net profit to mother increased 17.29% year-on-year. In the natural gas sales business, the company achieved a total of 970 million square meters of gas sales in 2018, of which about 550 million square meters were sold by residents and 410 million square meters by non-residents. The sector achieved revenue of 2,406 billion yuan, an increase of 120.87% over the previous year. In the gas connection business, the company connected to a total of 330,000 gas households throughout the year, contributing 1,439 billion yuan in revenue, an increase of 26.82% over the previous year. Higher intake prices have led to a decline in gross margin of gas sales. The company's natural gas source, which is expected to return to normal levels in '19, mainly comes from CNPC, accounting for about 80%. When CNPC implemented a new gas pricing strategy in '18, the company purchased more high-priced gas sources outside of the contract, and some subsidies were not settled. As a result, the unit gas sales cost increased from 2.06 yuan/square meter in '17 to 2.27 yuan/square meter. As a result, the gross margin of gas sales also dropped 4.74 percentage points to 8.33% compared to '17. After entering 2019, the contract gas volume between the company and CNPC will be determined based on actual gas purchases in 2018. At that time, this portion of gas volume will be guaranteed to a greater extent, and the gross margin of gas sales is expected to return to a normal level of around 15%. The Jingzhou and Fuyang projects are operating well. There is plenty of room for future mergers and acquisitions. In November '17, the company acquired 100% of the shares in Jingzhou Natural Gas. In 18, it achieved net profit of 93.2 million yuan after deduction, which slightly exceeded the performance promise. Since then, the company acquired 100% of Guozhen Gas's shares in cash in July '18, and major breakthroughs have been made in epitaxial mergers and acquisitions. Guozhen Gas's main business area is located in Fuyang, Anhui, with a resident population of 8.093 million people. The gas gasification rate of natural gas is still low, and there is great room for future development. Judging from the natural gas situation across the country, small local gas distributors are currently less profitable due to limited gas sources and high market prices. In this context, we judge that the company still has plenty of room for extended mergers and acquisitions in the future, and the business scale is expected to expand further. Vertical extension opens up the entire industry chain and maintains Baichuan Energy's “buy” rating. In addition to expanding the scale of business through epitaxial mergers and acquisitions, the company is also actively expanding upstream and downstream of the industrial chain. On the one hand, the company established Northeast Asia Natural Gas Co., Ltd. to build the Suizhong County LNG receiving station (design receiving capacity of 3 million tons/year). The receiving station has now been included in the “Special Plan for Natural Gas Storage Construction Facilities in Liaoning Province” and has been reported to the national level for approval. Construction is expected to begin in the second half of '19. At the same time, the company also invested in the establishment of Baichuan Investment in Hong Kong to develop oil and gas resources projects and international energy trade. From a downstream perspective, the company is also actively developing gas, electricity and distributed energy, gradually transforming it from a regional urban gas operator to a national clean energy service provider with a diversified industrial portfolio. We expect the company's revenue levels to reach 6.46 billion yuan, 7.783 billion yuan, and 9.214 billion yuan respectively in 2019-2021. Net profit attributable to owners of the parent company will be 1,237 billion yuan, 1,402 billion yuan, and 1,581 billion yuan respectively, corresponding to EPS of 1.20 yuan, 1.36 yuan, and 1.53 yuan, maintaining the company's “buy” rating.