Incident: On March 22, 2024, Xinao Co., Ltd. released its 2023 annual report: in 2023, the company achieved operating income of 143.754 billion yuan, a year-on-year decrease of 6.68%, net profit to mother of 7.091 billion yuan, an increase of 21.34% over the previous year, and net profit to mother after deduction was 2,459 billion yuan, a year-on-year decrease of 47.35%.

Basic earnings per share were 2.30 yuan, up 21.05% year on year, and the weighted average return on net assets was 34.39%, up 0.96pct year on year.

In the fourth quarter of 2023, the company achieved operating income of 47.843 billion yuan, an increase of 66.46% and a year-on-year increase of 0.82%; realized net profit of 3,988 billion yuan, an increase of 343.35% and a year-on-year increase of 48.56%; and realized net profit of 385 million yuan after deduction, a decrease of 44.36% month-on-month and a year-on-year decrease of 85.92%.

In addition, the company issued an asset impairment notice to prepare 1,328 billion yuan for the impairment of Xinneng Energy, a holding subsidiary of the company, for the total methanol plant and related assets, reducing the company's net profit to the mother in 2023 by 1,064 billion yuan.

Comment:

The growth rate of the platform's trading climate is objective, contributing to the main increase in performance. According to the company's 2023 annual report, in terms of gas traded on natural gas platforms, the sales volume of gas traded on the company's platform reached 5,050 billion square meters in 2023, an increase of 44.0% over the previous year. Among them, gas traded on overseas platforms reached 1.937 billion square meters, and gas traded on domestic platforms reached 3.113 billion square meters. The gross margin of the gas trading business on the platform was 18.07%, a year-on-year decrease of 0.98 pct, but the profit level of the gas trading business on the natural gas platform was still high in 2023. In terms of retail gas, the company's retail gas volume reached 25.144 billion square meters in 2023, a year-on-year decrease of 3.1%. Among them, the gas volume of industrial and commercial users reached 19.486 billion square meters, a year-on-year decrease of 4.36%; the retail gas volume of residential users reached 5.348 billion square meters, an increase of 3.82% over the previous year. In terms of wholesale gas, the company's wholesale gas sales volume reached 8.477 billion square meters in 2023, an increase of 25.47% over the previous year. In terms of energy production, the company achieved sales of 2.469 million tons of commercial coal in 2023, a year-on-year decrease of 52.88%, and completed the sale of coal mine assets in the fourth quarter, further focusing on the natural gas business; in 2023, the company's methanol sales volume was 1,549,000 tons, up 9.86% year on year, and has gradually developed emerging downstream customers such as fine chemicals and methanol fuel.

The Zhoushan receiving station has steadily supported sales, and the overseas general cooperation agreement has signed more than 10 million tons of contracts. The first phase of the Zhoushan receiving station project was officially put into operation in October 2018. The second phase of the project was put into operation in June 2021. The actual processing capacity can reach 7.5 million tons/year, and the third phase of the project has an additional design processing capacity of 3.5 million tons/year. The overall third phase of construction is expected to be put into operation in September 2025, and the actual processing capacity will exceed 10 million tons/year after commissioning. In 2023, the company signed a new long-term agreement of 1.8 million tons/year with the US company Cherney. The NEXTdecade 2 million ton long-term cooperation agreement came into effect. The long-term agreement with Chevron and Total determined the price for the next 5 years, and signed a long-term resource framework agreement with the Abu Dhabi National Petroleum Company. The total overseas long-term cooperation exceeded 10 million tons/year.

Short-term dividend increases are superimposed on dividend plans. High dividends and high dividends highlight investment value. In terms of dividends, according to the company's 2023 profit distribution plan, it is proposed to distribute a cash dividend of 0.91 yuan (tax included) per share, of which a cash dividend of 6.6 yuan (tax included) for every 10 shares is the company's 2023 annual dividend, and a cash dividend of 2.5 yuan (tax included) for every 10 shares is a special dividend. Based on the closing price of 19.4 yuan/share on April 9, 2024, the dividend rate is 4.69%. According to the “Xinao Stock Shareholder Dividend Return Plan for the Next Three Years (2023-2025)” issued by the company, the annual increase in cash dividends distributed over the next three years will not be less than 0.15 yuan/share (tax included). According to the “Xinao Stock Special Shareholder Dividend Plan for the Next Three Years (2023-2025)” issued by the company, the company will pay special dividends on the investment income obtained from the 100% share sale transaction of Xinneng Mining. Cash dividends of 0.25 yuan (tax included), 0.22 yuan (tax included), and 0.18 yuan (tax included) per share from 2023 to 2025.

Cost improvements are compounded by smooth price promotion, and urban combustion performance is expected to be optimized and improved. In terms of upstream gas sources, international oil and gas prices fell overall in 2023 compared to last year. The company used the Zhoushan receiving station as a strategic fulcrum to strengthen international long-term, medium and short-term LNG resource acquisition, ensure continuous, healthy and stable resources, and reduce resource acquisition costs. In terms of natural gas prices, the National Development and Reform Commission issued the “Guiding Opinions on Establishing and Improving the Upstream and Downstream Price Linkage Mechanism (Draft for Comments)” in April to further rationalize the natural gas price transmission mechanism and accelerate upstream and downstream price linkage. Furthermore, some provinces and cities have successively improved the natural gas price mechanism, which is expected to further promote the cost optimization of the company's urban gas sector. In terms of downstream distribution, the company has a strong natural gas distribution network and related infrastructure. With the adjustment of the company's sales strategy and cost optimization, urban combustion performance is expected to be further optimized and improved.

Profit forecasting and investment advice. We recommend Xinao Co., Ltd. based on the following three aspects: 1) Natural gas is the only clean energy in fossil energy, and demand will be strong in the future. As one of the national urban combustion companies, the company's performance is expected to continue to grow. 2) With international and domestic dual resources linkage, the company strengthens the advantages of integrated upstream, middle and downstream natural gas, relies on a comprehensive strategic layout, and has great potential for development. 3) The company continues to deploy new energy technology, build an industrial Internet ecosystem, and actively promote the integration of energy services. We expect the company to achieve operating income of 155.606 billion yuan, 169.566 billion yuan, and 180,810 billion yuan in 2024-2026, net profit of 6.507 billion yuan, 7.655 billion yuan, and 8.375 billion yuan, EPS (diluted) of 2.10 yuan, 2.47 yuan, and 2.70 yuan. With a closing price of 19.25 yuan/share on April 10, 2024, the corresponding PE is 9.0x/7.7x/7.0x. Considering the continued growth in domestic demand for natural gas, the first coverage provides a “purchase” ratings.

Risk warning: International energy price fluctuation risk, exchange rate fluctuation risk, safe operation risk, derivatives price fluctuation risk.