The business structure is clear, the main urban combustion business radiates from Shenzhen to surrounding provinces, and profitability is steady. The company is based in Shenzhen and gradually radiates the urban combustion business to Anhui, Jiangxi, Jiangsu, etc.; after 2020, it will cultivate a “clean energy” business represented by photovoltaic film through capital operation. By the end of 2023, the company had more than 7.63 million natural gas users, with pipeline gas sales volume of 4.84 billion cubic meters in 2023, up 18.28% year on year; of these, urban gas sales volume was 3.331 billion cubic meters, up 11.07% year on year, and power plant sales volume was 1.509 billion cubic meters, up 38.06% year on year. In 2023, revenue was 30.929 billion yuan, up 2.88% year on year; net profit attributable to shareholders of listed companies was 1.44 billion yuan, up 17.80% year on year. In terms of revenue structure, urban combustion, gas resources, integrated energy, smart services and others accounted for 57%, 14%, 22%, and 7% respectively in 2023.

Demand side: The increase in base period costs supports the urban fuel business to recover the high procurement costs that have not been transmitted downstream in the past few years, and gross margin repair stimulates performance elasticity. The downstream price of the urban combustion business is priced by the government in accordance with the principle of permitted revenue. In the period when an upstream and downstream linkage mechanism is not established, upstream prices cannot be transmitted to the downstream in a timely manner, and the company's net profit is greatly affected by fluctuations in natural gas prices. In March 2024, Shenzhen approved the company's resource procurement costs and raised the base period costs under the linkage mechanism. On this basis, the gas sales price was raised by 0.31 yuan/cubic meter. The company's high procurement costs can be reasonably recovered during the period 2021-2023. As Shenzhen promotes “bottle reform,” construction of gas and electricity projects, and expansion of the scale of demand, the correction of gross margins driven by price increases is expected to bring great elasticity to the company's performance.

Supply side: Natural gas prices fluctuated and declined. As an integrated upstream and downstream enterprise, the company's gross margin is expected to rise further. Since 2023, global natural gas prices have fluctuated and declined, and overseas LNG prices have remained low; the average price of imported LNG in China has recovered to the level of 2019-2020. Furthermore, in August 2023, the company issued the second phase of the Shenzhen Natural Gas Reserve and Peak Diversion Depot Expansion Project, a convertible bond raising project. It is expected that after delivery, LNG sales will increase by 1.5 million tons per year, helping the company build a more complete natural gas production, storage and marketing industry system, which is expected to drive the company's gross margin to rise.

The integrated energy and smart services sector is developing steadily, consolidating the basic profit market. After 2020, through investment and holding, the company successfully laid out two major sectors: integrated energy and smart services. Among them, the comprehensive energy business uses Swick, which produces photovoltaic film, as the profit core, and contributed 17.8% and 18.6% to net profit in 2021/2022. The smart service sector relies on the company's stable customer base. Sales of smart gas meters, gas appliances, gas insurance, etc. grew rapidly. In 2023, the revenue of the segment was 2.177 billion yuan, an increase of 33.97% over the previous year.

Profit forecast and valuation: The net profit due to mother for 2024-2026 is 1.518, 1.649, and 1.8 billion yuan, respectively, with year-on-year growth rates of 5.4%, 8.6%, and 9.2%, respectively. The current stock price corresponds to 13, 12 times, and 11 times PE. Xinao Co., Ltd., Fuyuan Energy, and Blue Sky Gas were selected as comparable companies, and their average valuation for 2024-2026 was 11 times, 10 times, and 9 times. Given that the company is located in Shenzhen, one of the most economically developed regions in the country, its gas consumption intensity and potential are significantly higher than that of the whole country, and there is a relatively definite increase in performance over the next few years. It was covered for the first time, and it was given a “buy” rating.

Risk warning: natural gas consumption growth falls short of expectations, risk of natural gas price fluctuations, risk of price competition in the photovoltaic film industry