High-quality resources regional urban gas distributors, covering the target price of 14.76 yuan per share for the first time

The company is a leading gas distributor in South China, initially exploring integrated energy services. The company ploughs the basic market of urban combustion in Foshan City, extends to the industrial transfer area, and enjoys the energy demand dividend of the manufacturing base. Industrial "coal to gas" and urban "bottle to pipe" accelerate, and we are optimistic about the company's leading industry in natural gas sales growth (CAGR=17%) in 2023-25. Domestic gas cost may now be a downward inflection point, urban fuel profitability is expected to hit bottom to rebound, we are optimistic that the company's net interest rate will rebound in 2023-25. We estimate that the 2023-25 net profit from homing will be RMB 1.418 billion, with CAGR (29%) better than peers (20%), giving the company a 23-year 18xPE, higher than the peer average (13.7x/Wind consensus expectations), and a target price of 14.76 yuan per share, covering the "overweight" rating for the first time.

Based on the extended layout of Foshan, the guarantee of gas supply remains abundant.

The company takes Foshan city fuel as the basic plate, and the high-pressure pipe network covers the whole of Foshan; the company extends the layout of city fuel business in line with the trend of industrial transfer, and has obtained 13 franchises by the end of 2022. In 2017-22, the business scale of the company increased rapidly, with revenue from 4.3 billion yuan to 18.9 billion yuan (CAGR=35%) and net profit from 347 million yuan to 655 million yuan (CAGR=14%). The company has established a "42nd" gas source structure in Foshan, with four main gas sources connecting Guangdong Dapeng LNG in the east, Zhongshan sea air in the south, Zhuhai LNG in the west and the second line of gas transmission from west to east in the north; two regulating gas sources include Shakou LNG storage and distribution station and Mingcheng LNG storage and distribution station. In addition, the company signed three new overseas LNG associations in 2021-22.

Economic recovery superimposed energy transformation, and gas sales in the region increased rapidly.

Natural gas is a realistic choice to achieve low-carbon transformation. Petrochina Company Limited's report predicts that the peak domestic demand will exceed 6000 billion square meters in 2040. Domestic natural gas consumption in 2022 is-1.7% year-on-year, and we expect it to rise by 7% year-on-year in 2023 and maintain a growth rate of 60.7% in 24-25. Industrial fuel (gas) is expected to resume growth, industrial "coal to gas" potential growth space. Commercial and residential gas consumption still has potential for growth, thanks to a moderate increase in urbanization and the continued promotion of "bottle-to-pipe". The industrial base and demographic advantages of the Greater Bay area give Foshan Energy a higher growth rate than that of the industry and peers, and we are optimistic that the company will continue to lead the growth rate of natural gas sales in 2023-25 (CAGR=17%).

The cost of buying gas may be at a downward inflection point, and profitability is expected to bottom out and rebound

In 2023, the domestic natural gas price is not weak in the off-season, and the price of three barrels of oil contract gas is higher than the same period last year. Imported LNG prices continued to fall, imported pipeline gas prices dropped sharply in May; the moving average of international LNG prices changed from rising to falling, we judge that some domestic LNG prices may have a downward inflection point. We believe that the company's gross margin may have hit bottom with ROA. In 2015-22, the gross margin decreased from 0.96 yuan per square meter to 0.26 yuan per square meter, and ROA from 10.7% to 4.5%. According to the gas price regulation rules, the company's profitability has room for upward repair, which will mainly benefit from: 1) the linkage mechanism of natural gas price has been gradually improved; 2) the newly signed LNG Association has started to supply since 2023, diluting the comprehensive procurement cost.

Risk hints: gas prices soar; domestic gas demand recovery is not as expected; domestic gas price policy risk.