Net profit to mother increased by 17% in 2023, and the profit forecast and target price of Shenzhen Gas forecast to achieve revenue of 30.9 billion yuan (+3%) in 2023, net profit to mother of 1.43 billion yuan (+17%, lower than Huatai's forecast of 1.54 billion yuan), after deducting 1.33 billion yuan (+22% year over year); corresponding to 4Q23 revenue of 7.7 billion yuan (+3% year over year), net profit to mother 320 million yuan (-11% year over year) after deducting net profit of 290 million yuan (YoY +4%). Natural gas sales were better than expected, and the pipeline gas sales forecast was raised; the price reduction was higher than expected, and the PV film revenue and gross margin forecast were lowered; the company's net profit to mother for 24-25 is estimated to be 16.5/1.86 billion yuan (previous value: 18.8/2.04 billion yuan); the company's net profit from gas/photovoltaic film is estimated to be 15.5/10 billion yuan in 24 years. The average value of PE in the gas/photovoltaic film industry in 2024 is 9/19x (Wind agreed expectations). The company was given 13x target PE for the gas sector in 2024 (gas sector is excessively undervalued), 18x target PE for the photovoltaic film sector (slight discount because the net profit CAGR of the company's photovoltaic film is lower than that of peers), with a target market value of 21.9 billion yuan and a target price of 7.62 yuan (previous value of 8.14 yuan, based on gas/photovoltaic film 15/16xPE in 2023). Maintain “buy-in.”

Natural gas sales were better than expected, and pipeline gas sales forecast was raised

The growth rate of natural gas sales slowed slightly, but pipeline gas sales for the whole year were higher than our previous forecast. 4Q23 totaled 1,324 million square meters (YoY +22%, 3Q +28%); by channel, pipeline gas sales 1,161 million square meters (YoY +14%, 3Q +18%), wholesale gas 63 million square meters (YoY +133%, 3Q +291%); by region, pipeline gas sales in Shenzhen were 556 million square meters (YoY +7%), and pipeline gas sales for offsite projects were 605 million square meters (YoY +21%); by user type, power plant sales volume 274 million square meters (YoY +22%), non-22% Power plant sales volume 1.05 billion square meters (YoY + 22%) After excluding power plants, pipeline gas sales in Shenzhen were -5% year-on-year in 4Q23, mainly due to a slowdown in industrial demand. Taking into account the commissioning of gas power plants and the increase in urban gas demand, we increased pipeline gas sales by 7%/9% to 57.48/6.583 billion square meters in 24-25.

The price reduction was higher than expected. According to the reduction in PV film revenue and gross margin, we estimate that the profit contribution of PV film 2H23 and 4Q23 is relatively limited. As the sales price of photovoltaic film followed a rapid decline in the average price of raw EVA particles (4Q -30% YoY, -16% month-on-month), the higher price of raw materials in the company's inventory put pressure on gross margin. Since 2024, the price of EVA particles has stabilized, and there may be relatively limited room for price reduction. Since the price reduction of the company's photovoltaic film in 2023 was higher than our previous expectations, the 24-25 revenue and gross margin forecasts were lowered, and the net profit contribution to the mother is expected to be 100/140 million yuan, respectively.

New regulations for urban village renovation have been released, and the connection and renovation business is expected to usher in new opportunities. Shenzhen plans to introduce new regulations to promote urban village renovation, clearly combine the three types of space for demolition, upgrading, and demolition, and prioritize the four types of urban village land used in the scope of demolition and construction. We determine that the total area of land used for demolition (including sporadic vacant land) for demolition and construction projects will exceed 30%. Currently, the company's connectable space in the Shenzhen region is becoming saturated, and the demolition and construction of urban villages can bring significant increases to the company's connectivity and transformation business (gas engineering and materials+smart services).

Risk warning: gas prices have risen sharply; demand for photovoltaic film falls short of expectations.