The growth rate of retail gas volume may be slightly higher than expected. Profit adjustments are slightly adjusted to forecast that the cold wave will increase demand for natural gas. According to data from the National Development and Reform Commission, the average daily supply of natural gas in the country since the 23 heating season was +5.8% year-on-year to 1.25 billion square meters. Demand for natural gas was slightly better than previously anticipated, slightly increasing the 24-25 retail gas volume growth rate; an increase in the fuel oil index is assumed. We adjusted the company's core profit forecast for 2023-25 to 66.0/71.4/7.78 billion yuan (previous value: 66.2/71.4/7.74 billion yuan), corresponding to EPS 0.76/0.82/0.90 yuan. Target price of HK$8.11 (previous value: HK$8.26, based on 10x2023PE), based on 9x 2024 expected PE and HKD/RMB exchange rate of 0.91. The company's strong cash flow is expected to support urban combustion project acquisitions and new energy business development, or bring long-term revaluation prospects. The target PE is 7 times higher than the three-year average PE. The company's dividend rate for 2022 was 4.1%. The company's profitable cash quality is solid, and free cash flow is expected to expand, supporting an increase in dividend payout ratio and maintaining a “buy” rating.

The 24-25 retail gas volume growth forecast was slightly raised, maintaining the retail price difference forecast. 1H23 is ahead of its peers in the year-on-year retail gas volume growth rate (+9.5%). Among them, the industrial gas volume growth rate (+11.1%) is particularly prominent, reflecting the company's recent expansion in urban combustion projects and the results of industrial customer development. Considering the low base effect of 2H22, the company's 2H23 retail gas volume is expected to achieve a year-on-year growth rate of more than 10%. We expect gas retail sales volume to be +10.1%/+9.6%/+8.5% YoY in 2023-25 (previous value: +10.1%/+9.2%/+8.1%). Since 2021, the company's retail gas price spread has fluctuated significantly lower than that of its peers, thanks to reliable and stable resource guarantees and a higher share of industrial and commercial gas. With the gradual improvement of the domestic natural gas price mechanism, the gas price spread among company residents is also expected to benefit. We maintain our judgment that the company's gas sales price spread was stable at 0.50 yuan/square in 2023-25.

The processing capacity of LNG receiving stations is expected to improve year on year. The pressure on the processing capacity of LNG plants is affected by the year-on-year increase in tank capacity due to warm winters at the beginning of the year. The average load rate and processing capacity of 1H23 Company's LNG receiving stations all declined to varying degrees year-on-year. The company implemented optimization efforts in the second half of the year, and we expect the overall processing capacity of LNG terminals to be +4% year-on-year in 2023. The processing volume of the 1H23 LNG plant was -16% year over year, and the average load rate decreased by 6.0 pp to 38.9% year over year. The LNG plant load rate increased month-on-month in the second half of the year, but we expect LNG plant processing volume to remain -2% year-on-year in 2023.

Strong cash flow is expected to support urban combustion project acquisitions and new energy business development. 1H23's operating cash flow was basically the same as 6.4 billion yuan year on year, and capital expenditure was basically the same as 2.2 billion yuan year on year. With strong cash flow support, the company continues to expand its urban combustion business. 1H23 added/acquired a total of 5 urban combustion projects, distributed in the central and western regions. The company's new business layout has basically taken shape. Using the integration of wind, gas and electricity as an entry point, it has obtained a new energy index of 3GW, and 8 new energy projects have been put into operation. New energy is expected to become a new driving force for the company's continued development.

Risk warning: Domestic demand growth is slowing; mergers and acquisitions falling short of expectations; global gas market uncertainty.