1H24 core profit is in line with our expectations

Xinao Co., Ltd. (Xinao-A) announced 1H24 results: revenue of 67 billion yuan, -0.3% YoY; net profit to mother of 2.53 billion yuan, +14.8% YoY, core profit 2.7 billion yuan, -14.8% YoY. After excluding the impact of coal assets, 1H24 core profit was -8.7% year-on-year, and the company's core profit was in line with our expectations.

1H24's platform gas sales volume was +21% to 2.7 billion square meters. Its domestic platform traded 1.74 billion square meters of gas, +52% year over year; Zhoushan LNG terminal processed 1.02 million tons, +14.6% YoY.

We estimate that of 1H24 Xinao-A's core profit, 1) Xinao Energy (Xinao-H) contributed about 1.1 billion yuan, 2) the platform's trading gas contributed about 1.2 billion yuan, 2) the Zhoushan LNG terminal contributed 0.35 billion yuan, 3) the total contribution of SHKP Engineering and methanol business was 0.15 billion yuan; 4) headquarters expenses were about 0.1 billion yuan.

Development trends

3Q24 The growth rate of trading gas sales on domestic platforms may have slowed down. Due to factors such as South Asian demand exceeding expectations and Middle Eastern geopolitics, international LNG spot recently rose significantly. As of August 23, Northeast Asian LNG spot closed at 13.8 US dollars/mmBtu, rebounding more than 50% from its low point during the year. Considering that current spot prices may have exceeded the affordability of coastal industrial and commercial customers and 3Q is a low demand season, we expect that 3Q24 may appropriately slow the pace of domestic sales of imported LNG, and the growth rate of domestic trading momentum on domestic platforms may decline sequentially. Looking ahead to 4Q24, considering that European gas inventories have reached historic highs, we believe there is a low probability that international LNG spot prices will continue to rise during the heating season. If domestic demand recovers, we judge that the growth rate of gas sales traded on the platform may increase sequentially.

Xinao-A's proprietary business capital expenditure cycle is nearing its end, and dividend payments are steady. The capital expenditure of 1H24 Company was 3.4 billion yuan, or -20% year-on-year, including the capital expenditure of Xinao-A's proprietary business segment was 0.46 billion yuan. Considering that the capital expenditure of Xinao-A's own business is mainly invested in the Zhoushan LNG Terminal Phase 3 production capacity expansion, we determine that after the completion and operation of Phase III of the Zhoushan LNG Terminal in 2025, the scale of the capital expenditure of Xinao-A's own business may be further reduced. The company promises an absolute dividend payment of no less than 1.03/1.14 yuan/share in 2024-2025. As the capital expenditure cycle of Xinao-A's proprietary business sector comes to an end, we believe there is still plenty of room for improvement in the company's medium- to long-term dividend payment capacity.

Profit forecasting and valuation

Due to the rise in international LNG spot prices, we lowered 2024/2025 net profit by 8.4%/6.8% to 5.568 billion yuan/6.241 billion yuan; the current stock price corresponds to 2024/2025 10.1x/9.0x P/E. Considering that the company has given an absolute dividend payment promise for 2024-2025, maintaining an outperforming industry rating and a target price of 25.00 yuan, corresponding to 13.9x/12.4x P/E in 2024/2025, there is 37.3% upside compared to the current stock price.

risks

LNG prices fluctuated greatly, and the smooth price progress of the natural gas retail business fell short of expectations.