Key investment points

Leading the South China Urban Fire Company, the layout continues to expand, and stable high dividends show long-term value.

The company is a leading urban combustion enterprise in Foshan in South China. It has benefited from the continuous progress of the local industrial coal-to-gas process, and the scale of the gas business has grown significantly in recent years. Furthermore, the company has taken the “windmill” of industrial transfer outside of Foshan to obtain pipeline gas franchises in many regions outside of Foshan, and the business landscape continues to expand. At the same time, the company is focusing on the development of businesses such as new energy, scientific and technological research and development, and equipment manufacturing, and is actively accelerating the pace of energy transformation. In 2023, the company passed a performance assessment with restricted equity incentives and proposed a high growth target for the next three years, demonstrating confidence in the long-term steady development of the company. In this context, we expect the company's cash dividend ratio to rise steadily from the current high level.

The overall demand for gas in the region is improving, and the forward price mechanism optimizes gross margin repair.

1) In terms of gas sales, China's apparent natural gas consumption bottomed out and rebounded in 2023, and demand is recovering clearly. The “Foshan Urban Gas Development Plan (2020-2035)” has been issued, making it clear that Foshan's natural gas consumption target for 2035 is about 11.5-11.9 billion cubic meters/year; based on Foshan's natural gas consumption of 2.32 billion cubic meters/year in 2020, the CAGR for the growth of natural gas consumption in Foshan should reach more than 11% between 2020 and 2035. As a leading urban fuel company in Foshan, the company has a remarkable location advantage.

2) In terms of gas prices, since 2023, international LNG has shown an easing trend in supply and demand, with prices falling sharply, leading to a decline in domestic gas source costs. Meanwhile, in February 2023, the National Development and Reform Commission issued a “Letter on the Situation of the Upstream and Downstream Price Linkage Mechanism of Natural Gas”. Since then, many provinces and cities have successively introduced policies to optimize the natural gas commodity characteristics, and the company's gas business gross margin is expected to be further repaired.

Towards new hydrogen energy productivity, hydrogen refueling stations and equipment are two-wheel drive.

In terms of comprehensive energy business, the company is based in Foshan, the “hydrogen energy industry capital of China”, and actively lays out the hydrogen energy industry chain in multiple directions. In recent years, the company has successively built and put into operation three hydrogen fueling stations in Foshan. Among them, Nanzhuang Station and Mingcheng Station are all multi-energy supply stations integrating hydrogenation, and the first domestically developed skid-mounted hydrogen production equipment with internationally leading performance was also used at Mingcheng Station, providing a localized hydrogen source solution for the construction of China's fuel cell vehicle demonstration urban agglomeration. In addition, the company also relied on Foran Tiangao to focus on breaking through the core technology of diaphragm compressors and greatly improving the comprehensive supply capacity of hydrogen energy equipment.

Profit Forecast and Valuation:

The company is expected to achieve revenue of 31.8/39.3/48 billion yuan in 2024-2026, +25%/+24%/+22%, respectively; net profit to mother is 0.972/1.115/1.254 billion yuan, respectively, +15%/+12%, respectively, corresponding PE 15/13/12 times, respectively. In terms of dividend rate, considering that the company's dividend ratio has continued to be around 70% in recent years, assuming that the company's dividend ratio is 70% in 2024-2026, it corresponds to the closing price on November 11, 2024. The dividend rates are 4.64%, 5.23%, and 5.88%, respectively. First coverage, giving a “buy” rating.

Risk warning

Demand for downstream natural gas fell short of expectations; gas source prices rose sharply; and the promotion of the favorable price mechanism policy fell short of expectations.