Core profit for 2023 is in line with our expectations

Xinao Co., Ltd. (Xinao-A) announced its 2023 results: revenue of 143.8 billion yuan, -7%; net profit to mother of 7.1 billion yuan, +21% year over year, corresponding to profit of 2.30 yuan per share; core profit (company caliber) of 6.4 billion yuan, +5% year over year. The company's core profit was in line with our expectations, of which 4Q22 core profit was 1.70 billion yuan. The company plans to pay a dividend of 0.91 yuan per share. The current price corresponds to a dividend rate of about 4.8%.

The company's natural gas sales volume in '22 was 38.7 billion square meters, +6.8% year-on-year. Among them, the platform's gas trading business achieved sales volume of 5.1 billion square meters, +44% over the same period last year.

We estimate that about 40% of Xinao-A's core performance in '22 was contributed by Xinao Energy (Xinao-H), that is, Xinao-A's self-operated business achieved core profit of about 3.8 billion yuan. We determined that 1) the core profit of the platform trading gas business was 3.4 billion yuan, +56% year-on-year, 2) Zhoushan Terminal's core profit of 700 million yuan, 3) SHKP Engineering's core profit of 400 million yuan, and 4) total operating losses of the headquarters and methanol business.

Development trends

The decline in spot prices may drive the company's domestic platform trading gas sales growth faster than expected. Benefiting from declining gas prices and increased downstream customer coverage, the company's domestic platform gas sales volume in 2023 was +110% year-on-year to 3.11 billion square meters. Based on the current global LNG supply and demand situation, we believe there is a possibility that the JKM spot price will drop to 7-8 US dollars/mmBTU during the off-season. Considering the company's flexible LNG spot trading strategy and the expected recovery of some price-sensitive natural gas demand after falling spot prices, we judge that the growth rate of gas traded on the company's domestic platforms is expected to exceed 20% of current market expectations in 2024.

Xinao-A is close to net cash, and dividend payouts are steady. The company promises a dividend of not less than 0.91/1.03/1.14 yuan per share in 2023-2025, and the 2023 dividend is in line with the guidelines. We estimate that after deducting the cash and interest-bearing liabilities on Xinao-H's balance sheet, the Xinao-A self-operated sector is close to net cash. Considering that the subsequent capital expenditure of Xinao-A's proprietary business is relatively small, we judge that there is still a lot of room for improvement in the company's medium- to long-term dividend payment capacity.

Profit forecasting and valuation

With the delivery of coal assets completed, we lowered our 2024 net profit by 21.4% to 6.08 billion yuan and introduced a profit forecast of 6.70 billion yuan for the first time in 2025. The current stock price corresponds to 2024/2025 9.8x/8.9xP/E. As of March 22, we estimate that after deducting the market value of Xinao-H, Xinao-A's proprietary business transactions were approximately 10x 24E P/E. Looking ahead, we believe that with the increase in gas sales on domestic platforms and the restoration of the Xinao-H city gas business, there is still room for improvement in the company's valuation, maintaining an industry rating and a target price of 25.00 yuan, corresponding to 12.7x/11.6x P/E in 2024/2025, with 30.6% upside compared to the current stock price.

risks

LNG prices fluctuated greatly, and the smooth price progress fell short of expectations.