Event: Shaanxi Natural Gas released its 2018 annual report. In 2018, the company's operating income was 9 billion yuan, an increase of 17.8% over the same period last year, and its net profit was 400 million yuan, an increase of 2.2% over the same period last year. The company issues a dividend plan with a cash dividend of 0.1 yuan per share (including tax).
Benefiting from the strong demand for natural gas, the growth rate of gas sales is considerable: the company's core business is long-distance pipeline and urban gas business. Benefiting from the strong demand for natural gas, the company sold 6.1 billion square meters of natural gas in 2018, an increase of 9.2% over the same period last year. From a business point of view, the company's provincial pipeline transportation and urban gas sales in 2018 were 57.2 million square meters and 3.8 billion square meters respectively, an increase of 8.2% and 27.0% respectively over the same period last year.
Price dispute resolution, transportation fee adjustment landing: according to the company's annual report, the price dispute between the company and upstream suppliers has been resolved in 2018, with a previous estimated cost of about 160 million yuan. In addition, with the acceleration of natural gas price reform, Shaanxi Province re-approved and adjusted the natural gas pipeline transportation price in June 2018. We believe that the landing of the natural gas pipeline transportation fee adjustment will reduce the market's concern about the change of the company's pipeline transportation fee. Under the combined influence of factors such as the growth of natural gas sales, the estimated cost of flushing back, and the adjustment of pipeline transportation fees, the company's gross profit margin in 2018 was 10.7%, an increase of 0.4% over the same period last year; the net interest rate was 4.6%, down 0.7% from the same period last year; and the net profit of returning home was 400 million yuan, an increase of about 10 million yuan (+ 2.2%) over the same period last year.
Open up the market and cultivate profit growth points: in addition to ploughing the pipe and transportation business in the province, the company will strengthen its market development efforts since 2018. According to the company's annual report, the company successfully acquired a 100% stake in Wuqi Baoze Natural Gas Company and invested across provinces to set up Heilongjiang Natural Gas Pipeline Network Co., Ltd. (20%) and Qinjin Natural Gas Co., Ltd. (49%). The above projects are expected to contribute to the performance increment.
Profit forecast and investment rating: according to the company's operating conditions, the company has lowered its profit forecasts for 2019 and 2020. the company's net profit in 2019 and 2020 is expected to be 4.1yuan and 530 million yuan respectively (before the adjustment is 5.0yuan and 590 million yuan respectively). The new forecast net profit for 2021 is 630 million yuan. It is estimated that the company's EPS in 2019-2021 will be 0.37,0.48,0.56 yuan respectively, and the current share price corresponding to PE will be 23,18 and 15 times respectively. We are optimistic about the development of the company's pipeline gas business and maintain the "overweight" rating.
Risk hints: the risk of a sharp rise in natural gas procurement prices, the lower-than-expected supply of natural gas by the company, the risk of further downward gas pipeline transportation and distribution fees, lower-than-expected downstream demand for natural gas, and the company's lower-than-expected progress of natural gas pipeline construction.