As an important part of the energy security strategy, the flexible and efficient characteristics of natural gas can support its synergistic development with various energy sources. This will play a positive role in the phase of carbon peaking and even carbon neutrality. Therefore, the development of natural gas companies is particularly important in the current trend of energy transition.

On August 29th, Tian Lun Gas (01600), which is committed to becoming a leading green and low-carbon energy supply and service provider in China, released its performance report for the first half of 2024. The financial report shows that Tian Lun Gas' revenue during the reporting period was 3.835 billion yuan, a year-on-year decrease of 3.3%. The net income after deducting the impact of the rural business factor was 0.167 billion yuan.

By further analyzing this financial report, we will have a clearer understanding of Tian Lun Gas' business operations in the first half of 2024, its future development layout, and its true value.

Stable gas sales business and continuous growth of value-added services

In the first half of 2024, the natural gas industry continued the growth trend of 2023. Thanks to the domestic industrial recovery and increased commercial activities, the consumption of natural gas has also increased, making China the main driving force for the growth of natural gas demand in the Asian market.

Data shows that in the first half of the year, China's natural gas consumption was 210.8 billion cubic meters, a year-on-year increase of 8.7%, natural gas production was 123.5 billion cubic meters, a year-on-year increase of 4.4%; natural gas imports were 90.2 billion cubic meters, a year-on-year increase of 14.8%. Obviously, the long-term consumption trend of natural gas has returned to a stable growth track.

Facing the continuous growth of the industry, Tian Lun Gas has actively deployed various businesses to ensure the high-quality development of its gas business and minimize the impact of the depressed real estate market. In terms of gas sales, Tian Lun Gas has vigorously carried out gas source optimization work to enhance its competitive ability. From the perspectives of resource acquisition, pipeline construction, and gas storage and peak shaving construction, it seeks to obtain low-cost and sufficient gas sources to the greatest extent. At the same time, it establishes an interconnected gas source network in operating regions that can generate synergies to enhance gas source coordination and supply capabilities. As of June 30, 2024, Tian Lun Gas has accumulated a total length of 9,332 kilometers of medium and high-pressure pipelines.

While continuously optimizing gas sources, Tian Lun Gas actively expands its customer base in gas sales by solidifying various types of customers. During the reporting period, Tian Lun Gas made great efforts to expand the number of residential users, also known as "ballast", with an increase of approximately 0.1268 million urban residential users, reaching a cumulative total of 3.72 million, a year-on-year growth of 7.9%.

At the same time, Tian Lun Gas continues to develop its advantages in the commercial and industrial user segment and further tap into the potential of these users. Through the formulation of flexible and effective strategies for commercial and industrial development, Tian Lun Gas added 1,903 commercial and industrial users, a significant increase of 29.7% compared to the same period last year.

Benefiting from the continuous growth in the number of urban residential users and commercial and industrial users, Tian Lun Gas added approximately 0.13 million households in terms of gas users during the reporting period. The gas consumption of urban residential users also increased by 5.6% to approximately 0.282 billion cubic meters, driven by the increase in user numbers. Based on this, wholesale gas volume increased by 5.7% year-on-year, and both factors contributed to a 1.7% increase in Tian Lun Gas's total gas sales volume to 1.1 billion cubic meters.

Following the increase in total gas sales volume, Tian Lun Gas's gas sales revenue during the reporting period reached 3.234 billion yuan, a slight increase of approximately 1% compared to the same period last year, with a proportion of 84.33% of the total revenue, further optimizing its business structure compared to 80.72% in the same period of 2023.

As the second growth curve of Tian Lun Gas, value-added services have achieved rapid growth during the reporting period. To further tap into the growth value of value-added services, in addition to traditional value-added businesses such as retrofitting, gas appliance sales, and insurance services, Tian Lun Gas actively builds its own brand and cooperates to establish its own brand production base, creating a win-win model with suppliers. At the same time, Tian Lun Gas continues to promote technological innovation, optimize its product system, and promote the coordinated development of online and offline channels. Thanks to significant achievements in channel and brand development, Tian Lun Gas's revenue from value-added services increased by 18.4% to 0.18 billion yuan during the reporting period.

The industry is benefiting from multiple bullish factors, and Tian Lun Gas is focusing on its core business to continuously enhance its competitiveness.

The development of every company is closely connected to the trends of the times and the industry. In this ever-changing world, companies are not only participants in economic activities, but also witnesses and promoters of the changes and evolution of the times and industries. Now, the trend of the natural gas industry has arrived.

In the first half of the year, the National Energy Administration issued the "Guiding Opinions on Energy Work in 2024". The "Opinions" pointed out that it will actively promote the coordinated development of new energy and traditional energy, focus on promoting the green and low-carbon transformation of energy, and deepen energy reform and innovation. Under the "dual-carbon" target, natural gas is an enabling energy to achieve the peak carbon dioxide emissions and carbon neutrality goals, and will continue to play a positive role in the peak carbon dioxide emissions and carbon neutrality stages.

The introduction of the "Opinions" has provided a clear positioning for natural gas in the era of new energy transformation, and the natural gas industry must achieve high-quality development to undertake the responsibilities of the "dual-carbon" target. This is the era of opportunity for the natural gas industry. Driven by the relevant "dual-carbon" policies, natural gas demand is expected to continue to grow.

Shanghai ShenYinWanGuo Securities Research Institute stated that by 2030, China's natural gas supply and demand will develop to nearly 550 billion cubic meters, which means that from 2023 to 2030, the compound annual growth rate of China's natural gas sales will continue to grow at a rate close to 5%.

By industry, residential gas demand benefits from the continuous improvement of China's urbanization level and the increase in the popularity of gas. The "coal-to-gas" catalyzes the demand for industrial and chemical gas, which will continue to increase the user's gas usage. In addition, the economic advantages of vehicle gas are apparent, with strong growth momentum in LNG vehicles, which is expected to drive a rapid increase in vehicle gas usage.

While domestic gas demand is expected to continue to grow, the international market supply and demand tends to be loose, and gas prices are expected to remain at a relatively low level, which is expected to lower costs for city gas companies. Guosen Securities stated that as European natural gas demand declines, Asia has become the main force driving natural gas consumption. Coupled with the expected start of the US LNG export projects in 2025, the global natural gas market supply and demand relationship is expected to ease, and gas prices are expected to remain at a relatively low level, thereby lowering costs for city gas companies and end users. On the other hand, domestic gas output has increased for 7 consecutive years by more than 10 billion cubic meters, with the China-Russia eastern pipeline gradually reaching production, and the LNG receiving terminal entering a peak period of production, leading to continuous growth of natural gas supply, supporting the growth of natural gas consumption.

In addition, the comprehensive promotion of the pricing mechanism for residential gas by the residents is a major positive for city gas companies and is conducive to the restoration of profitability for city gas companies. In June 2023, the National Development and Reform Commission issued the "Guiding Opinions on Establishing a Sound Price Linkage Mechanism for Natural Gas Upstream and Downstream", which marks the important moment when the comprehensive promotion of the pricing mechanism for residents is accelerating.

Soochow Securities stated that from 2022 to June 2024, 52% (152 cities) of cities at the prefecture level and above in the country have adjusted the residential price mechanism, with a price increase of 0.22 yuan per cubic meter. Soochow Securities believes that cities that have not adjusted the price will continue to promote the adjustment during the off-season, and it is expected that more cities will promote the adjustment before the start of the 2024 heating season (before the end of October 2024), and the price adjustment flexibility continues to show. According to Soochow Securities' calculation, the reasonable value of city gas distribution fees is above 0.6 yuan/cubic meter, and there is still a 20% room for price difference restoration.

Facing new industrial opportunities, tian lun gas stated that the company will focus on the core business of city gas, adjust its business measures according to local conditions, and fully exert the operational and adaptability capabilities formed by the efficient organizational structure to effectively strengthen the construction of a sustainable operation system and continuously enhance the core competitiveness of the company in the city gas business.

First, Tian Lun Gas will carry out deep exploration of the gas storage business, vigorously expand new users, especially industrial and commercial users, further increase the proportion of industrial and commercial gas sales, and continuously increase retail gas volume by increasing customers.

Secondly, Tian Lun Gas will continue to carry out multi-dimensional optimization of gas sources based on the first half of the year, continuously improve gas source competitiveness. At the same time, Tian Lun Gas will further rationalize the terminal gas price, take multiple measures to continuously optimize the gross margin, thereby improving the company's profitability.

At the same time, Tian Lun Gas will accelerate the value exploration of value-added services. During the reporting period, Tian Lun Gas's brand and channel construction of value-added services has achieved significant results. The company will increase investment to further expand the success of the brand, maintain the continuous rapid growth of value-added services through the synergistic development advantage of the business, and continuously solidify the foundation of the second growth curve of value-added services.

In summary, in the face of the era of opportunity, the gas industry has returned to a growth track since 2023 and has been further confirmed in the first half of this year. At the same time, the favorable news such as the expectation of maintaining low gas prices and the launch of the residential end price mechanism will accelerate the development of the entire gas industry. Tian Lun Gas will continue to benefit from the growth of the entire industry. As the company continues to expand new customers, optimize gas sources, rationalize gas prices, and accelerate the development of value-added services to enhance market competitiveness, Tian Lun Gas will release even stronger growth momentum, achieving sustained and steady growth.

Regarding the stock price, Tian Lun Gas' current market value of 3.4 billion Hong Kong dollars corresponds to a PB valuation of only 0.52 times, which means that the company's market value is only half of its net assets, significantly lower than the historical average PB valuation of 1.9 times. This indicates that in the depressed market environment, the true value of Tian Lun Gas has been significantly underestimated. This may be a good opportunity for long-term layout. As the future business of Tian Lun Gas continues to advance and performance accelerates, its stock price may also rise.