Event

Blue Flame Holdings issues Annual report 2019 and Quarterly report 2020

According to the annual report released by Blue Flame Holdings in 2019, the company achieved operating income of 1.887 billion yuan in 2019, down 19.13% from the same period last year; realized net profit of 557 million yuan, down 17.86% from the same period last year; and realized net profit of 538 million yuan after deduction, down 20.07% from the same period last year.

During the reporting period, the company achieved earnings per share of 0.58 yuan, with a weighted average ROE of 13.56%, down 5.83% from the same period last year.

In addition, the company achieved operating income of 372 million yuan in the first quarter of 2020, down 8.55% from the same period last year, and net profit of 100 million yuan, down 20.79% from the same period last year.

Brief comment

The sales volume of coalbed methane increased significantly, and the decline in revenue from the construction of gas wells dragged down the performance in 2019. The company's coalbed methane sales revenue increased by 13.05% year-on-year to 1.336 billion yuan.

In terms of coalbed methane sales, new breakthroughs were made in the production release of the company's new blocks during the reporting period, and coalbed methane sales increased by 13.7% year-on-year to 781 million cubic meters. At the same time, due to the improvement of the overall production and sales rate, the annual gross profit margin of the company's coalbed methane sales business reached 45.97%, an increase of 3.11 percentage points over the same period last year. But on the other hand, due to the decline in demand for gas well construction business and the decrease in construction business volume compared with the same period last year, the company's gas well construction business achieved business income of 248 million yuan, down 70.59% from the same period last year, which is a certain drag on the company's annual performance.

Coalbed methane subsidy policy change, prudent principle confirms that income affects net profit in June 2019, the Ministry of Finance issued the "Supplementary notice on", stipulating that in accordance with the principles of "more compensation" and "winter supplement", ladder award or deduction funds shall be given with reference to the mining utilization and distribution coefficient of the previous year. The actual compensation funds received by the company will be affected by such factors as the total amount of financial compensation funds and the national total amount of unconventional natural gas exploitation and utilization included in the scope of compensation. Due to the change in policy subsidies, according to the principle of prudence and the actual central financial subsidies and local financial subsidies of 0.1 yuan per cubic meter, the company confirmed that the annual coalbed methane sales subsidy was 205 million yuan, a decrease of 52.4394 million yuan compared with the same period last year. it also has a negative impact on the overall profit level.

The reserves of coalbed methane resources are constantly expanding, and the subsequent release is worth looking forward to.

In November last year, the company further obtained the exploration rights in Fangdong Block, Heshun Ma. by the end of 2019, the company had completed a total of 203wells and fractured 68 in five new blocks, and 40 had been put into operation. among them, the average daily gas production in Liulin Shixi block is about 65000 cubic meters, and the sale has been realized. The completion depth of No. 6 horizontal well group in Wuxiang block is 2203 meters, and the daily output is nearly 8000 cubic meters. We believe that the company currently has sufficient reserves of coalbed methane resources, with the gradual progress of late mining work, the company's coalbed methane sales are expected to continue to grow.

Maintain Blue Flame Holdings "Buy" rating

Although the growth rate of natural gas consumption in China has declined slightly in the past two years, the increasing proportion of natural gas consumption in domestic primary energy has not changed. Coalbed methane as one of the most abundant gas sources in the upper reaches of China's natural gas industry chain, we believe that the country will continue to vigorously promote the coalbed methane industry to increase production in the future.

As the leading enterprise in the domestic coalbed methane industry, its coalbed methane production and sales are expected to grow rapidly in the future. We expect that from 2020 to 2022, the company will achieve operating income of 2.01 billion yuan, 2.141 billion yuan and 2.282 billion yuan respectively, and return to its mother net profit of 666 million yuan, 742 million yuan and 825 million yuan, corresponding to EPS of 0.69,0.77 yuan and 0.85 yuan respectively, maintaining the "buy" rating of Blue Flame Holdings.

Risk hint: the production of the new block is not as expected; the loose supply and demand of the industry leads to a decline in the price of coalbed methane; the amount of government subsidy is reduced.