Incident: The company released its report for the third quarter of 2020. It achieved operating income of 2.84 billion yuan in the first three quarters, a decrease of 22.0% over the previous year, and Guimu's net profit of 4.1 billion yuan, a decrease of 37.5%; 3Q20's operating income was 6.1 billion yuan, a decrease of 28.0% over the previous year, and Guimu's net profit was 80 million yuan, a decrease of 44.1% over the previous year.
Core views
The decline in gas volume at gas stations dragged down 3Q20 revenue, and the overall business structure continued to be optimized: affected by the pandemic, the overall pace of the connection business slowed down, superimposed the company's prudent financial policy of using receipts to confirm revenue. At the same time, the gas station business volume declined 22.0% year-on-year to 2.84 billion yuan in the first three quarters, and 3Q20 revenue fell 28.0% year-on-year to 660 million yuan. The revenue structure is gradually being optimized. The 1H20 company's gas sales business accounts for 74.5% of revenue. Compared with 1H19 accounting for 60.8%, the share of gas sales business has increased dramatically. 2H20 is expected to expand further with the increase in sales volume generated within existing projects. With the advent of the fourth quarter heating season, we expect gas sales to remain flat year over year.
Gross margin declined slightly in the first three quarters, and the 4Q20 gross margin is expected to rise: due to the impact of the epidemic on the advancement of the high-margin connection business, the company's gross margin for the first three quarters fell 4.3pct to 25.8% compared to the same period last year. The company's net interest rate for the first three quarters was 14.7%, down 3.6 pct from the same period last year. Overseas LNG spot prices have plummeted this year. The average price of NYMEX natural gas since the beginning of the year has been 2.0 US dollars/million British heat (corresponding to 0.5 yuan/square meter), -21.2% over the same period last year. The sharp drop in the spot price of imported LNG has lowered the average gas cost, which is expected to have a positive impact on the company's gross margin in 4Q20.
Outreach mergers and acquisitions and internal growth initiatives are gaining momentum: in 2017-2018, the company successively acquired Jingzhou Natural Gas and Fuyang projects, and in October 2019, the company acquired 100% of Zhuolu Dadi and Suizhong Dadi's shares. The business layout has gradually expanded from Beijing-Tianjin-Hebei to the whole country, compounding the increase in the internal penetration rate of the project, driving the company's long-term steady growth.
Financial forecasting and investment advice
Due to the impact of the epidemic on the construction period of the connected business, combined with the risk of repeated potential outbreaks in the later stages, we lowered the company's profit forecast. The net profit returned to the mother in 2020 and 2022 was 6.0/83/1.04 billion yuan respectively (previously 10.9/129/1.44 billion yuan respectively). Based on the valuation of comparable companies, we gave 11 times PE in 2021, with a target price of 6.27 yuan (previously 10.64 yuan), maintaining the purchase rating.
Risk warning
Project expansion fell short of expectations; poor natural gas prices in the winter led to a decline in gross margin.