Matters:
The company released its report for the third quarter of 2019. The 2019 Q1-Q3 achieved revenue of 3.64 billion yuan, an increase of 17.7% over the previous year; the net profit of the mother was 660 million yuan, a decrease of 8.7% over the previous year. Among them, Q3 revenue was 840 million yuan, an increase of 3.8% over the previous year, and net profit returned to the mother in a single quarter was 140 million yuan, a decrease of 35.8% over the previous year.
Comments:
The increase in gas volume was in line with expectations, and the decline in the share of connections affected single-quarter profits. The decline in Q3 profit was mainly due to the decline in the company's connection business. Since the number of coal-to-gas connected households in rural areas of the company remained high in 2018, and since the average connection fee for rural coal-to-gas households was higher than in cities, the decline in connection volume dragged down the company's profits. Growth in the gas sales business is still in line with expectations. 2019 Q1-Q3 gas sales increased 38.2% year on year to 840 million square meters. Compared with the 35.8% growth rate of 2019 H1 gas volume, the year-on-year growth rate of Q3 gas volume remained high. However, since the absolute value of gas sales during the off-season was low, net profit in a single quarter was still dominated by a decline in net profit.
Optimizing supply and demand is expected to maintain an optimistic level of optimism, leading to a steady decline and a gradual improvement in the business structure.
Looking at the whole year, we believe that the company's gas sales business is still expected to maintain healthy growth. (1) In terms of gas volume, downstream consumption in Beijing-Tianjin-Hebei, Fuyang and Jingzhou, the company's main operating areas, is still expected to maintain an endogenous growth rate of 15% or more, driven by policies and endogenous growth in penetration rates; (2) In terms of profitability, purchases of high-priced gas outside the equilibrium volume of the 2019Q4 company are expected to decline due to improvements in domestic supply and demand. Furthermore, with the end of the Mura-mura Pass, the focus of connectivity shifted to the development of urban and non-residential users, which also cushioned the decline in the connection business. With the decline in the connection business and the increase in gas sales, the company's business structure has improved quarter by quarter, and its dependence on project-driven profits is also expected to gradually decrease.
Finances remain healthy. The company's Q1-Q3 sales and management expenses ratio was well controlled and remained stable year over year. The financial expense ratio increased 1.5 pct to 1.7% year on year due to increased borrowing, but the overall debt ratio remained at a healthy level of 46.8%. At the same time, looking at cash flow, the net cash flow from operating activities in Q1-Q3 was 430 million yuan, an increase of 16.2% over the previous year. We think this is also related to the improvement in the company's business structure and the decline in the share of projects. Cash of 530 million yuan remained sufficient at the end of the Q3 period.
The acquisition of Zhuolu and Suizhong projects will expand future growth around existing resources. The company purchased Zhuolu Dadi Gas and Suizhong Dadi Natural Gas with 195 million yuan and 25 million yuan respectively in cash in October. Zhuolu Dadi's main operating areas were located in Zhangjiakou, Cangzhou and Baoding. Profits improved markedly in January-August 2019, reversing losses from -7.26 million yuan in 2018 to 3.68 million yuan, further strengthening the company's business layout around Beijing-Tianjin-Hebei. However, the land of Suizhong is still under construction, and will mainly cover Huludao City and the counties and cities under its administration. Since the company's LNG terminal in Suizhong is expected to be put into operation in 2022-2023, the company's active layout in advance will facilitate the smooth consumption of the receiving station at that time. At the same time, it will also expand its business scope to Liaoning, increasing the space for future gas volume growth.
Investment advice: Considering the impact of the decline in the number of connected users of the company on profits, we lowered the company's net profit from 2019 to 2020 to 1.26 billion yuan and 1.26 billion yuan (previous value was 1.23 billion yuan, 1.4 billion yuan). The corresponding PE was 8.8 or 8.1 times. The company's profit share of gas sales continues to rise. The company was given a target valuation of 12 times in 2019 based on segmental valuations, with a corresponding target price of 9.61 yuan, maintaining a “strong push” rating.
Risk warning: gas sales business growth fell short of expectations; coal-to-gas repayments fell short of expectations; upstream price increases exceeded expectations.