Incident: On the evening of April 26, the company released its 2024 quarterly report. 2024Q1 achieved operating income of 34.209 billion yuan, a year-on-year decrease of 0.41%; realized net profit of 1,081 billion yuan, a year-on-year decrease of 25.80%; realized net profit of 100 million yuan after deduction, an increase of 7.47%; achieved core profit of 1,082 million yuan, a year-on-year decrease of 12.85%; and achieved basic core income of 0.35 yuan per share. Excluding the Hong Kong stock Xinao Energy's overseas non-basic business, the basic business achieved core profit of 1,074 billion yuan, an increase of 17.8% over the previous year.

Comment:

The decline in 2024Q1's core profit was mainly due to a sharp drop in gas prices, and the profit of the Hong Kong stock Xinao Energy wholesale gas overseas resale business shrank. Excluding this impact, the core profit of the underlying business increased 17.8% year over year.

1) Retail volume recovered year on year, and price spreads continued to improve. 2024Q1's retail gas sales volume was 7.237 billion square meters, up 2.7% year on year; among them, industrial and commercial gas volume was 5.224 billion square meters, up 2.9% year on year; people's livelihood gas volume was 1.947 billion square meters, up 2.5% year on year. Furthermore, benefiting from the decline in market-based gas source prices since this year and the continued progress of downstream smooth prices, the company's gas sales price spread has further improved.

2) Domestic platform trading volume has increased dramatically, and the utilization rate of receiving stations has increased. 2024Q1 achieved a trading volume of 1,213 billion square meters on the platform, an increase of 33.6% over the previous year. Among them, benefiting from falling gas prices, the increase in imported gas volume, CNPC's incremental supply, and the rapid expansion of the domestic downstream market, 2024Q1 achieved 833 million square meters of domestic gas transactions, an increase of 95.5% over the previous year. Among domestic customers, 45% were large industrial users and 43% were urban gas users; due to the fall in international gas prices, 2024Q1's international gas volume declined year on year, achieving 380 million square meters of gas traded internationally, a decrease of 21.2% year on year. In terms of receiving stations, 2024Q1's Zhoushan LNG terminal handled 430,000 tons, an increase of 34.4% over the previous year.

Looking forward to the future, the company's retail gas business profits are expected to improve in 2024, benefiting from the decline in upstream gas prices, the continuous promotion of good downstream prices, and the restoration of gas sales; in the long term, with the release of the upstream low price agreement and the rapid expansion of the downstream market, the company's platform trading gas business is expected to usher in high growth.

1) With cost optimization and continuous promotion of superposition gas volume restoration, the company's urban combustion business performance is expected to improve in 2024. In terms of upstream gas source costs, the price of petroleum pipeline gas remained flat during the 2024-2025 contract, fell slightly during the off-season, and domestic marketable gas sources and overseas LNG spot prices dropped sharply (the average CIF price of imported LNG from January to 2024 was 9.27 US dollars/million British thermal heat, down 33% year-on-year). The company used the Zhoushan LNG terminal as a fulcrum to increase procurement of international low-cost spot gas sources and optimize upstream resource costs. In terms of downstream sales prices, since 2022, some provinces and cities in China have successively perfected and launched natural gas price mechanisms for residents and non-residents. We expect that in 2024, more cities will be expected to launch natural gas surplus mechanisms to channel the rise in the company's historical gas purchase costs and further repair the company's gross margin. In terms of gas sales, upstream gas prices are falling, economic recovery, and domestic natural gas consumption are expected to continue to grow. As one of the top five national urban combustion companies, the gas sales growth rate was lower than that of its peers in 2023. As the company adjusts its sales strategy and enhances cost and price competitiveness, the company's retail gas volume is expected to return to a growth trajectory in 2024.

2) In 2025 & 2026, 7.1 million tons/year is expected to be released, and the company's direct gas sales business has high growth potential. As of the 2023 annual report, the company has signed 9 overseas long-term agreements with overseas LNG suppliers, with a total contract volume of 10.16 million tons/year. Of these, it has signed 5 low-price long-term agreements linked to HH with US LNG suppliers, with a total contract volume of 7.4 million tons/year. Up to now, Xinao Co., Ltd. has implemented the Executive Director Agreement of about 2.34 million tons/year, and the 2025/2026 incremental long-term agreement will be implemented in 2025/2026, respectively, to support the rapid expansion of the direct gas sales business. At the same time, the company is currently expanding the Zhoushan LNG terminal to match the sharp increase in Changxie gas volume in the future. Zhoushan currently has a processing capacity of 7.5 million tons/year, and the processing capacity is expected to increase to 10 million tons/year by 2025.

3) The three-year dividend increase promise is combined with a special dividend plan, and the deterministic value of the company's high dividend has increased significantly. In 2023, the company plans to distribute a cash dividend of 9.1 yuan (tax included) for every 10 shares to all shareholders.

According to the “Xinao Co., Ltd. Shareholder Dividend Return Plan for the Next Three Years (2023-2025)”, the amount of cash dividends distributed by the company over the next three years will increase by no less than 0.15 yuan/share (tax included) per year, that is, the company's dividend per share for 23-25 years will not be less than 0.66/0.81/0.96 (tax included). In addition, the company announced that it plans to pay a special three-year dividend on investment income from the sale of 100% of Xinneng Mining's shares. The special dividend for 23-25 is 0.25/0.22/0.18 yuan (tax included) per share, respectively. According to the comprehensive dividend commitment and special dividend plan, the company's dividend per share in 2023-2025 will not be less than 0.91/1.03/1.14 (tax included). Based on the 2024/4/26 closing price, the dividend ratio is at least 5.1%/5.8%/6.4%, respectively.

Profit forecast and rating: Xinao Co., Ltd. has the advantage of the entire natural gas industry chain, which helps to resist gas price fluctuations and support the continuous steady growth of profits. The direct gas sales business is expected to expand in 25 & 26 with a total of 7.1 million tons/senior gas source, and the downstream market is rapidly developing to drive the high growth of the direct gas business; the upstream resource pool cost of the retail gas business has been optimized, and downstream smooth prices continue to advance. The 24-year urban fuel margin is expected to be further repaired, and retail gas volume is expected to resume growth, driving the company's urban combustion business profit increase.

We predict that the company's net profit for 2024-2026 will be 5.66 billion yuan, 6.53 billion yuan, and 11.07 billion yuan, EPS will be 1.83 yuan, 2.11 yuan, and 3.57 yuan, respectively. PE corresponding to the closing price on April 26 will be 9.71/8.41/4.96 times, respectively, maintaining a “buy” rating.

Risk factors: The domestic economy is seriously declining, and the growth rate of natural gas consumption falls short of expectations; the construction progress of the receiving station project is lower than expected; domestic natural gas prices fall short of expectations; and comprehensive energy sales are lower than expected.