2023 results are in line with our expectations

The company announced its 2023 results: revenue of 30.929 billion yuan, +2.9% year on year; net profit to mother of 1.44 billion yuan, +17.8% year over year, corresponding to profit of 0.50 yuan per share, in line with our expectations. The company plans to pay an annual dividend of 0.16 yuan/share, with a dividend rate of 32%.

In 2023, the company's pipeline gas sales volume was 4.840 billion cubic meters, +18.28% year-on-year. Among them, urban gas sales in Shenzhen were 1,240 billion cubic meters, +5.2% year on year; urban gas sales volume outside Shenzhen was 2,091 billion cubic meters, +14.9% year on year; and gas sales volume for power plants was 1,509 billion cubic meters, +38.1% year over year.

Development trends

The profitability of the urban fuel gas distribution business in Shenzhen is expected to improve. The Shenzhen Municipal Development and Reform Commission announced in March that it would raise the benchmark price of gas for residents and industrial and commercial gas in Shenzhen to 3.41/4.30 yuan/square meter respectively in accordance with the price linkage mechanism. Furthermore, considering the decline in LNG spot prices, we believe that natural gas procurement costs in Shenzhen may be reduced by 0.1-0.2 yuan/square meter year on year in 2024. We judge that the increase in gas prices and the downward cost may drive the profit of the gas distribution business in Shenzhen to recover slightly from 2023 to about 4-5 billion yuan in 2024.

The profit repair trend for offsite projects is likely to continue. In 2023, Shenzhen Gas Investment Co., Ltd., which is responsible for the investment and operation of offsite projects, had a profit of +33% to 530 million yuan. Looking ahead, considering that most of the company's offsite projects are located in provinces and cities such as Anhui/Jiangxi, where the lithium battery industry chain is well developed, we are optimistic that the company's offsite project sales growth rate will continue to grow rapidly in 2024. Coupled with the good overall price situation of offsite projects, we determine that the gross margin of offsite projects in 2024 may still be fixed.

The “bottle reform” in Shenzhen is nearing its end. The company added 940,000 new users in the Shenzhen region in 2023 (vs 450,000 in 2022). We believe that most of the increase was contributed by the “bottle conversion” business. Considering that the penetration rate of pipeline gas in Shenzhen reached 92% by the end of 2023, we believe that the bottle change-related engineering installation and material sales business, which contributed greatly to the company's profits in 2021-2023, may decline from 2024.

Profit forecasting and valuation

Considering that the “bottle reform” in Shenzhen is nearing its end and LNG spot prices are declining, we lowered our 2024 revenue forecast by 24% to 34.8 billion yuan. Considering the improvement in profits in the gas distribution business in Shenzhen, the profit forecast for 2024 remained unchanged at 1,759 billion yuan, and introduced a profit forecast of 2,065 billion yuan for the first time. The current stock price corresponds to 12.3x/10.4x P/E for 2024/2025. Maintaining an industry rating and a target price of 8.50 yuan, corresponding to the 2024/2025 13.9x/11.8x P/E, there is 13.3% upside compared to the current stock price.

risks

Natural gas prices fluctuated greatly, and the smooth price progress was lower than expected.