1Q24 results are in line with our expectations

The company announced 1Q24 results: revenue of 6.86 billion yuan, -9.4% year on year; net profit to mother of 276 million yuan, +6.7% year over year, corresponding to profit of 0.1 yuan per share, in line with our expectations.

1Q24's natural gas sales volume was 1,307 billion square meters, +9.7% year over year, of which pipeline gas sales volume was 1.17 billion square meters, +11.8% year over year, and natural gas wholesale volume was 136 million square meters, -5.6% year over year.

Development trends

The 2Q24 urban combustion business is expected to continue to improve. In terms of local business in Shenzhen, since March 16, the company has raised the benchmark price of gas for residents in Shenzhen by 0.31 yuan/square meter to 3.41/4.30 yuan/square meter according to the price linkage mechanism; in addition, 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 gas price increase and cost reduction may drive the profit business of pipeline gas sales in Shenzhen from a slight profit in 2023 to about 4-5 billion yuan. In terms of offsite business, 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 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 favorable price situation of offsite projects, we determine that the gross margin of offsite projects may still be fixed in 2024.

Lower spot prices may drive an increase in the profitability of the wholesale gas business in 2024. As of April 26, the Asian JKM/European TTF price was $10.4/9.3/mmBtu, -9.4%/10.8% compared to the beginning of the year.

Looking ahead, considering 1) European gas inventories on the demand side remain high, and demand for replenishment is weak, and 2) on the supply side, we expect US Freeport LNG (16.5 million tons/year) to resume production in early May. We expect LNG spot prices to fall and difficult to rise in May-June. We believe that if the spot price of LNG falls to a reasonable range, the company can obtain considerable wholesale profits by importing international LNG spot resources domestically with its own infrastructure.

The adhesive film business is likely to maintain steady growth. The profit and loss of minority shareholders of 1Q24 increased by about 10 million yuan over the same period last year. We believe this suggests that 1Q24's adhesive film business profit is relatively stable. Looking ahead to the full year of 2024, considering that the global PV installed capacity is still expected to maintain a high growth rate, we judge that the profit of the adhesive film business may still be expected to maintain steady growth throughout the year.

Profit forecasting and valuation

The profit forecast for 2024 and 2025 remains unchanged. The current stock price corresponds to the 2024/2025 price-earnings ratio of 12.4x/10.5x. Maintaining an industry rating and a target price of 8.50 yuan, corresponding to 13.9 times the price-earnings ratio of 2024 and 11.8 times the price-earnings ratio of 2025, there is 12.3% upside compared to the current stock price.

risks

LNG prices have risen sharply, and the smooth price progress of offsite projects has fallen short of expectations.