Incidents:

On October 28, Guangzhou Steel Gas released its 2024 three-quarter report: In the first three quarters of 2024, the company achieved operating income of 1.498 billion yuan, a year-on-year increase of 10.54%, and realized net profit to mother of 0.181 billion yuan, a year-on-year decrease of 20.09%.

Investment highlights:

2024Q3 revenue continued to grow, and net profit to mother declined year over year. As new electronic bulk gas projects were put into operation in the early stages, and production capacity climbed. 2024Q3, the company achieved operating income of 0.526 billion yuan, an increase of 14.32% year on year; however, due to the year-on-year decline in helium revenue and gross profit, the company's net profit to the mother fell 33.32% year on year to 0.046 billion yuan, and net profit after deducting non-return mother fell 41.51% year on year to 0.038 billion yuan.

The gross profit margin and net interest rate declined year on year, and the sales expenses ratio declined year on year. In the first three quarters of 2024, the company's gross margin was 27.94%, down 8.66pct; the company's management expense ratio increased 0.29pct to 7.65% year on year, and the sales expenses ratio and R&D expenses rate decreased by 0.37pct/0.13pct to 1.83%/5.04% year on year respectively; the company's financial expenses were -0.003 billion yuan, compared to 0.019 billion yuan in the same period last year. In the first three quarters of 2024, the company accrued credit impairment losses of 0.006 billion yuan, an increase of 0.003 billion yuan compared to the same period last year; accrued asset impairment losses of 0.002 billion yuan, compared with the same period last year. Combining the above factors, the company's net interest rate for the first three quarters of 2024 fell 4.44pct year-on-year to 12.25%.

Existing projects have been put into operation one after another to expand the electronic special gas business to help future development. In 2024, it obtained electronic bulk gas projects such as Wuhan Chuxing (Phase II) and Zhuhai Huacan, consolidating the company's leading position in the domestic electronic bulk gas business. In terms of construction management of existing projects, the company has successively commercialized various projects such as Beijing Electric Power Collection, Fangzhengwei, and Wuhan Chuxing (Phase I). In the field of general industrial gases, the company successfully won the bid for the supporting air separation project for the Chifeng Jintong Phase II copper smelting project and achieved a new breakthrough. In terms of electronic special gas, the company's electronic specialty gas R&D and production base projects in Hefei, Anhui and Chifeng, Inner Mongolia have been officially implemented. Electronic specialty gas products in the process of industrialization include various core products such as electron-grade NF3, C4F6, HCl, and HBr.

Profit forecast and investment rating The decline in helium revenue and gross profit affects the company's short-term profit. We lowered the company's 2024/2025/2026 revenue forecast to 2.118/2.558/3.094 billion yuan, and net profit to mother to 0.261/0.346/0.442 billion yuan, corresponding PE is 46/35/27 times, respectively; however, the company has formed autonomous and controlled technical capabilities around the helium supply chain, and has become the first domestic gas company to enter the global helium supply chain. The barriers are high; we are optimistic about the company Long-term follow-up development, maintaining the “gain” rating.

Risks indicate that downstream customers' gas consumption falls short of expectations; the risk of a sharp drop in gas supply prices; the construction progress of projects under construction falls short of expectations; the risk of large fluctuations in stock prices in the secondary market; the risk of declining market share of core resources; and the risk of falling gross margin.