I. Incident Overview
Recently, we participated in company research and exchanged information with management on future development strategies, etc.
II. Analysis and Judgment
The growth rate of natural gas consumption in Anhui in the first half of the year was superior to that of the whole country, and there is plenty of room for improvement in the long term
The company was founded in 2003 and is an Anhui natural gas pipeline network company. The main source of profit is pipeline transportation costs. After the company went public in 2017, it changed its business ideas, actively expanded downstream and upstream, expanded fields such as urban combustion and distributed energy, with the aim of building a comprehensive energy service provider. In the first half of the year, macroeconomic downward pressure increased and the scale of coal-to-gas growth decreased. China's actual natural gas consumption increased 9.4% year-on-year, a slowdown from 2018, while the growth rate of natural gas consumption in Anhui Province remained 16%, which was superior to the national average. This was mainly due to the rapid growth rate of the local economy. At the same time, coal-to-gas conversion progressed steadily in the past, without overdraining demand. Looking at the long term, Anhui's 13th Five-Year Plan gas energy accounts for 5.9%, lower than Jiangsu (15%) and Zhejiang (10%), which also belong to the Yangtze River Delta region, and there is plenty of room for improvement. According to estimates, if only all small boilers under 20 steam tons in Anhui were replaced by natural gas, local gas sales would increase by 4 to 5 billion square meters, equivalent to 80% to 100% of the province's gas sales in 2018.
Pipeline and transportation business is not affected by upstream price increases. The urban fuel sector has a low base and high flexibility
In terms of gas price adjustments, Anhui Province actually implements a cost audit once a year. In May 2018, the freight rates for some of the company's short-haul pipelines dropped from 0.3 yuan/minute to 0.24 yuan/minute, which had a certain negative impact on the company's profits. However, future growth in natural gas consumption will also make up for part of the losses caused by policy price checks. At the same time, pipeline prices are independently approved and are not affected by upstream gas source price increases. The company's urban fuel business started late. Currently, it has gas franchises in 12 districts and counties including Suzhou City and Guangde County. With the gradual development of local business, the 2019H1 company's urban gas transmission volume increased 190% year-on-year to 153 million square meters, and related subsidiaries have turned a loss into a profit of 10 million yuan. At the same time, the company's urban network business accounts for a relatively small amount of connection fees. It mainly earns profits from sales, and is less affected by the national connection fee policy.
The State Grid Corporation is expected to be listed in October, which favors the company's long-term development
According to the Economic Observer, the National Oil and Gas Pipeline Network Company will be listed by the end of September at the latest. The establishment of the State Grid Corporation began in 2016. Its original purpose was to guarantee the independence of midstream pipelines and pipelines, liberalize upstream and downstream competition, and at the same time increase the construction of the midstream pipeline network. This is a major breakthrough in the gas market-based reform. In the long run, the establishment of the State Grid Corporation is expected to optimize resource allocation, reduce upstream gas sales prices, boost natural gas consumption, and benefit the company's development.
III. Investment Suggestions
Optimistic about the continued growth of natural gas consumption in Anhui Province, the company's EPS for 2019 to 2021 is expected to be 0.67/0.80/0.91 respectively, corresponding to the current PE stock price of PE 16/13/12x. The company predicted PE 16x in 2019, lower than the average of 22x in the gas sector. It was at the bottom since listing. It was covered for the first time and gave a “recommended” rating.
4. Risk Reminder:
1. Pipeline network construction progress falls short of expectations; 2. Urban fuel development falls short of expectations; 3. State Grid listing progress falls short of expectations