Incident: On May 15, 2024, Nanchang City issued the “Implementation Measures on the Upstream and Downstream Price Linkage Mechanism for Pipeline Natural Gas (Draft for Comments)”, which will be implemented from August 31, 2024. Among them, in principle, the sales price of residential gas terminals does not exceed 12 months, with a single increase of no more than 0.5 yuan/square meter. The natural gas price linkage is applied for initiation by an urban combustion enterprise, or it can also be implemented voluntarily by the price authority.

Major pipeline gas operators in Nanchang City, and the gross margin of the urban combustion sector is expected to be further restored. The company's gas group is the city gas operator with the largest number of users in Jiangxi Province. It has pipeline gas concessions in the main administrative area of Nanchang City, mainly including gas sales and gas engineering installation services. By the end of 2023, the company had 1,328,800 natural gas users, a gas pipeline length of 7414 kilometers, and a gasification rate of 82.3%. In 2023, the company's gas sales volume was 525 million square meters, +2.30% year on year, achieving operating income/net profit of 20.03/146 million yuan, respectively, +5.25%/+43.13%, accounting for 24.89% of the company's total operating income, achieving a gross profit margin of 9.85%, and a year-on-year increase of 4.53pct. It is expected that with the implementation of the fair price system in Nanchang City, residential gas prices will rise. Coupled with the easing of gas procurement costs, the company's gross margin in the urban fuel sector is expected to be further repaired.

Actively promoting “factory network integration” is expected to continue to increase performance. The company has 20 years of experience in sewage treatment operation and management. Currently, it has 107 sewage treatment plants, including 98 in Jiangxi Province and 9 outside the province, involving treatment capacity of 3.6985 million tons/day, covering more than 80% of the urban sewage treatment market in Jiangxi Province. In 2023, the company completed 1,161 million cubic meters of sewage treatment, +0.91% year on year, sewage treatment service revenue of 2,398 billion yuan, +4.56% year-on-year, accounting for 29.79% of the company's total revenue, achieving a gross profit margin of 41.54%, +0.31pct year on year. The “Jiangxi Provincial Urban Domestic Sewage Treatment Quality and Efficiency Action Plan (2022 - 2025)” proposes that by the end of 2025, the province will build more than 2,400 kilometers of sewage networks and renovate more than 1,600 kilometers of sewage networks. The company will steadily advance project acceptance and complete the layout of a number of “factory network integration” outlets in Jinxian County, Anyi County, Chongren County, etc., with a total investment of more than 3.7 billion yuan, which is expected to continue to increase revenue and profit for the company.

The layout of a new direct drinking water circuit is expected to become a new growth point in the future. Direct drinking water is a value-added service for municipal water. The company actively lays out a new direct drinking water circuit, making every effort to promote safe, economical and convenient piped direct drinking water projects, focusing on water supply chains, extending the water chain, and strengthening the water chain, and striving to build 100 direct drinking water projects by the end of 2024 to achieve the goal of 400 tons of direct drinking water per day, which is expected to grow into a new growth point for the company in the next 3-5 years.

Profit forecast: Maintain the company's “gain” rating. We expect the company to achieve revenue of 84.15/88.11/9.137 billion yuan in 2024-2026, and net profit to mother of 11.76/12.69/1,351 billion yuan, and corresponding PE of 11.85x/10.98x/10.32x, respectively.

Risk warning: Changes in the macroeconomic situation at home and abroad have exceeded expectations, gas price progress falls short of expectations, project progress falls short of expectations, profit forecasts and valuation models fall short of expectations, etc.