Report summary:

A comprehensive urban fuel company with a “gas+clean energy” two-wheel drive, has seen steady growth in business performance. The company was founded in 1982 and successfully listed in 2009. By the end of 2023, the company had operated pipeline gas projects in 57 cities (districts) in 11 provinces (regions) including Guangdong, Guangxi, and Jiangxi, while actively laying out businesses such as gas resources, integrated energy, and smart services. Since 2018, the company's revenue and profit have grown steadily, mainly due to the expansion of the scope of the franchise and the expansion of the scale of gas sales; in 2021-2022, due to high international gas prices, etc., the company's profitability declined. Beginning in 2023, as gas prices gradually returned to the normal range, the gross margin of the company's pipeline gas was gradually restored.

Natural gas sales have grown steadily, fully benefiting from upstream cost mitigation and downstream smooth price implementation. 1) Increased sales volume: The country's natural gas consumption was +7.71% year-on-year in 2023. It is expected that China's natural gas demand will continue to grow steadily in 2024, but the growth rate may decline somewhat. Continued commissioning of gas power plants in Shenzhen is expected to provide additional volume in the future, while there is still room for improvement in gasification rates outside of Shenzhen. 2) Cost mitigation: The overall sales price of petroleum pipeline gas is stable in 2024-2025, while LNG prices are expected to remain low. Changxie Resources with LNG spot prices linked to LNG spot prices or urban combustion companies with LNG terminal resources are expected to benefit. The company coordinates multiple gas sources such as West-East Gas Pipeline Line 2 and Guangdong Dapeng in the Shenzhen region, owns shareholders' rights at the Dapeng LNG Terminal, and independently builds the Shenzhen Natural Gas Reserve and Peak Shifting Depot, which has strong cost control capabilities. 3) Smooth price progress: In March 2024, Shenzhen announced a 0.31 yuan/square increase in the price of gas used by residents and non-residents. On the one hand, the company's pipeline gas price difference in Shenzhen has been directly repaired. On the other hand, the increase in natural gas prices in Shenzhen has an exemplary effect across the country. Major cities across the country are expected to follow up with favorable prices in 2024, driving the company's price differences outside of Shenzhen to also be repaired.

Actively deploy clean energy and continue to promote smart services. The company actively lays out clean energy, and achieved a win-win situation between gas and electricity by acquiring Shenzhen Thermal Power in 2020. The company is promoting the construction of 2 9F units. It is expected to boost the company's natural gas sales and power business performance in the future. In 2023, the company signed a 165MW photovoltaic contract and started construction of 80.6MW of photovoltaic projects across the country. It will continue to contribute profits in the future. At the same time, the company continues to promote the smart service business. Through mergers and acquisitions, the gross margin of smart services has continued to increase since 2020, and it is expected that it will continue to contribute to the company's profit growth in the future.

Profit forecast: Maintain the company's “gain” rating. We expect the company's revenue for 2024-2026 to be 324.61/345.41/36.738 billion yuan, net profit to mother of 16.51/18.582.95 billion yuan, and corresponding PE 13.70x/12.17x/10.30x, respectively.

Risk warning: Changes in the macroeconomic situation at home and abroad have exceeded expectations; competition in the photovoltaic film industry has intensified; natural gas prices have fallen short of expectations; gas prices have risen sharply; profit forecasts and valuation models fall short of expectations