Key points of investment:

Incident: The company released its 2024 semi-annual report. The first half of 2024 achieved operating income of 13.78 billion yuan, a year-on-year decrease of 9.48%, and realized net profit of 0.738 billion yuan, an increase of 13.64% over the previous year, slightly lower than our expectations. It was mainly due to the year-on-year decline in power plant gas volume due to weather factors in the first half of the year and Swick's photovoltaic film business fell short of expectations.

Gas sales increased, and smooth prices hit, and the volume and price of the main urban combustion business rose sharply. 1H24's pipeline gas sales volume was 2.488 billion cubic meters, up 6.87% year on year. According to user types, urban gas sales were 1.82 billion cubic meters, up 10.17% year on year; due to rain and weather, power plant sales were 0.668 billion cubic meters, a decrease of 1.18% year on year. On March 15, 2024, the Shenzhen Development and Reform Commission issued the “Notice on Jointly Adjusting the Sales Price of Pipeline Gas in Our City”, which adjusted the first-tier gas price for residents to 3.41 yuan/m3, and adjusted the benchmark sales price of industrial and commercial gas in Shenzhen to 4.30 yuan/m3. This price adjustment was implemented for the first time after the Shenzhen co-pricing mechanism. The residential gas price increased by 0.31 yuan/m3, up 10% from the previous residential first-tier gas price of 3.1 yuan/m3; the benchmark price for industrial and commercial gas was also increased by 0.31 yuan/m3 to 0.31 yuan/m3 4.30 yuan/m3. After a 20% increase, the highest sales price for industry and commerce can reach 5.16 yuan/m3. At the same time, smooth prices are going well in regions other than Shenzhen, Anhui, etc., and resident-side surplus prices effectively channel upstream cost pressure, and the company's gross margin is expected to continue to recover. 1H24's pipeline gas achieved gross profit of 0.996 billion yuan, an increase of 47.55% over the previous year.

Overseas gas prices have declined to optimize procurement costs, and a long-term cooperation agreement has been signed to guarantee the supply of resources. Overseas LNG prices have declined since 2023, and the company has seized the favorable opportunity of declining procurement price fluctuations to effectively reduce procurement costs. The company strengthened cooperation with superior resource suppliers such as CNPC and Dapeng Phase I, and signed a medium- to long-term agreement with CNPC in March 2024 to guarantee a ten-year long-term cooperation contract volume of 9.69 billion cubic meters. The company's Shenzhen Natural Gas Reserve and Peak Diversion Depot Phase II expansion project began at the end of 2022. After the project is put into operation, the company's natural gas reception and storage capacity will be further enhanced.

The photovoltaic film business is under pressure, and falling volume and price are dragging down performance. 1H24 sold 0.283 billion square meters of adhesive film, a year-on-year decrease of 10.73%. Affected by the decline in film sales and prices, 1H24's comprehensive energy business achieved revenue of 2.327 billion yuan, a year-on-year decrease of 32.20%, achieving gross profit of 0.234 billion yuan, a year-on-year decrease of 39.17%; due to the decline in material sales due to the completion of the “bottle conversion” project in Shenzhen, 1H24's smart service revenue was 1.022 billion yuan, a year-on-year decrease of 5.02%. Reduced costs led the smart service business to achieve gross profit of 0.569 billion yuan, an increase of 35.54% over the previous year.

Financial fee cuts improve performance. In the case where LPR was lowered three times in a row in June of last year, February of this year, and July of this year, the company's average financing cost decreased, and 1H24's financial expenses decreased by 0.008 billion yuan to 0.162 billion yuan over the same period last year. Due to the termination of the company's Qingshuihe Smart Gas Industrial Base project, an impairment preparation of 0.055 billion yuan was calculated, causing a certain drag on the company's performance.

Profit forecast and valuation: Considering the decline in the volume and price of the company's photovoltaic film business, we lowered the company's 2024-2025 net profit forecast to 1.655 billion yuan and 1.895 billion yuan (previous values were 1.815 and 2.135 billion yuan), respectively, and added the 2026 forecast to 2.278 billion yuan. The current stock price corresponds to PE of 11, 10, and 8 times, respectively. Industrial, commercial and residential gas profits have gradually recovered, industrial chain integration has gradually improved, and the comprehensive energy business has opened up room for growth and maintained a “buy” rating.

Risk warning: risk of rising intake costs, risk of fluctuating PV film prices