Introduction to this report:

The increase in 1Q24 performance was mainly due to improved management costs. The company's air supply is stable, and the gross margin is expected to be fixed.

Key points of investment:

Maintain the “gain” rating: The company's gas supply is stable, the gross margin is about to be fixed in 2024, maintain the 2024-2026 EPS of 0.58/ 0.65/0.74 yuan, maintain the target price of 9.86 yuan, and maintain the “gain” rating.

The results are in line with the quick results reporting guidelines. The company's 1Q24 revenue was 6.86 billion yuan, -9.4% year over year; net profit to mother was 280 million yuan, +6.7% year over year, in line with the performance report guidelines.

Management expenses improved, and 1Q24 performance improved. 1Q24 pipeline gas sales were 1.17 billion cubic meters, +11.8% year over year (of which urban gas sales were 920 million cubic meters, +9.4% year over year; power plant sales volume was 250 million cubic meters, +21.7% year over year). The company's 1Q24 gross profit margin was 15.2%, +1.4 ppts year on year; net profit was 320 million yuan, +10.0% year over year. We estimate that the 1Q24 performance increase was mainly due to cost improvements: 1Q24 management fee ratio of 1.2%, -0.5 ppts year over year.

The air supply is stable, and the gross margin is expected to be fixed. The company has abundant gas reserves. In March 2024, it signed a new 10-year long-term agreement with CNPC (contract gas volume of 9.69 billion cubic meters). At the same time, with the commissioning of the second phase of the reserve project, the company's long-term LNG turnover capacity is expected to increase to 2.8 million tons (previously 800,000 tons), and the gas source procurement capacity will be further improved. In the context of the decline in overseas gas prices, along with the smooth price implementation in Shenzhen (gas prices for residents and non-residents in Shenzhen increased by 0.31 yuan/cubic meter from March 16, 2024), we expect the company's gross margin to be fixed, and short-term performance flexibility can be released: using static estimates based on 2023 operating data (gas sales volume of 1.24 billion cubic meters for non-power plants in Shenzhen in 2023), the current Shenzhen price adjustment contributed about 260 million yuan to the net profit of Shenzhen gas.

Risk warning: The rise in gas prices exceeded expectations and reduced profits, the profit of photovoltaic film fell short of expectations, etc.