1Q24 deducted non-net profit +16% year-on-year to maintain profit forecast and target price

Shenzhen Gas released its first quarterly report. 1Q24 achieved revenue of 6.86 billion yuan (-9% YoY), net profit to mother of 276 million yuan (+7% YoY), and deducted non-net profit of 269 million yuan (+16% YoY), which is in line with the performance report. Maintaining the profit forecast, we expect the company's EPS for 2024-2026 to be 0.62/0.69/0.80 yuan, respectively; the company's net profit from gas/photovoltaic film is estimated to be RMB 16.6/120 million yuan in 24 years. The average value of PE in the gas/photovoltaic film industry in 2024 is 10/20x (Wind agrees). The company was given 14x target PE for the gas sector in 2024 (premium due to the company's net profit CAGR of 16%, higher than that of peers) and 17x target PE for the photovoltaic film sector (discount due to the company's photovoltaic film net profit CAGR of 28%, lower than 43% of peers), with a target market value of 25.3 billion yuan and a target price of 8.8 yuan. Maintain “buy-in.”

Urban gas: Pipeline gas sales are better than peers, and smooth price implementation favors a recovery in profit margins

Pipeline gas sales in 1Q24 were +12% to 1.17 billion square meters, continuing the industry-leading gas volume growth rate; among them, power plant sales were +22% to 250 million square meters, and are expected to continue to benefit from falling gas prices combined with the commissioning of new power plants; urban gas sales were +9% to 920 million square meters, and the Shenzhen region was +5% to 360 million square meters. Demand for industrial gas has yet to rebound, and commercial gas demand is improving. Other regions outside Shenzhen are +13% to 550 million square meters, driven by new energy and other industries. Shenzhen completed urban fuel efficiency in March '24. The impact in the first quarter was limited, but the scale of profit growth throughout the year was considerable. We expect the gross margin of pipeline gas to gradually rise to 16% in 24-26.

Gas resources: Wholesale gas volume declined year-on-year, and the LNG supply chain continued to strengthen 1Q24 gas wholesale volume by -6% to 140 million square meters. We expect to benefit from the decline in LNG prices in 24; the company's overseas long-term cooperation resources landed and a new contract with CNPC was 9.69 billion square meters in 10 years, highlighting the advantages of diversification of the company's resource pool; the company used the Dapeng pipeline to develop power plants and urban combustion users along the route to ensure subsequent long-term cooperation consumption. The second phase of the Shenzhen Natural Gas Reserve and Peak Diversion Depot expansion project began at the end of '23 and is scheduled to be put into operation in '26. At that time, the company's annual LNG turnover capacity is expected to increase from 800,000 tons to 2.8 million tons. The company's own LNG ship was officially delivered in early '24 and temporarily leased. In the future, with the launch of the company's LNG agreement, it is expected to mitigate shortfalls in capacity and strengthen the company's LNG supply chain.

Comprehensive energy: PV film profit declined year on year, and PV and natural gas power generation combined with Swick (company holding 49.94%) maintained the second largest market share in the world. PV film sales in '23 were +32% to 670 million square meters, adding 120 million square meters of production capacity; however, due to falling film prices, 1Q24 net profit contribution declined year on year. The company focuses on high-quality photovoltaic resources in the Greater Bay Area. At the end of '23, it had an installed capacity of 245 MW and an annual power generation capacity of nearly 300 million kilowatts; Deep Fuel Thermal Power Phase II 9F (2x470,000) Unit 1 was about to be put into operation, and Unit 2 began construction in November '23.

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