Considering new customers and changes in gas demand, we slightly reduced Xinao Energy's core profit for 24-26 by 2.5%/3.1%/2.1% to 6.68/7.43/8.23 billion yuan. Retail sales are growing moderately, and the growth rate is expected to be +4.8%/+5.7%/+5.0% in 24-26; the price spread is expected to continue to rise due to surplus price and cost reduction. The 24-26 price difference is expected to be 0.54/0.55/0.56 yuan/square. Pan-energy sales have maintained high growth, and the Smart Home business market space is sufficient. The company's target dividend ratio for 2024 is 44% (yoy+4pp), which corresponds to a dividend rate of 5.2%.

We expect the company's free cash flow to dividend ratio to increase in 24-26 to maintain “buying.”

Retail volume is growing moderately, and price spreads are expected to continue to rise thanks to surplus prices and cost reductions

The company's 9M24 gas retail sales volume yoy +4.8% to 18.819 billion square meters; of these, industrial and commercial yoy +5.7% to 14.843 billion square meters, and residential yoy +3.4% to 3.748 billion square meters. Considering new customers and changes in gas demand, we expect the company's retail gas volume growth rate to be +4.8%/+5.7%/+5.0% (previous value +5.6%/+5.3%/+4.6%) in 24-26. The company's 9M24 retail gas price spread yoy+3 points reached 0.54 yuan/square. Thanks to the decline in natural gas procurement costs and the continuous implementation of favorable prices, the household gas price ratio reached 59%; we expect the company's 24-26 retail gas volume price difference to be 0.54/0.55/0.56 yuan/square (previous value 0.54/0.55/0.55 yuan/square meter), and the cost reduction and forward price are expected to continue. The company 9M24 has 1.102 million new connections (yoy -19%), and we expect 1.49/1.32/1.17 million new connections in 24-26.

Pan-energy sales have maintained high growth, and the Smart Home business market space is sufficient

The sales volume of the company's 9M24 Pan-Energy business was +21% to 29.668 billion kilowatt-hours; the 3Q24 growth rate slowed due to seasonal effects and power business restructuring. By the end of September, the company had 347 projects in operation. We expect these projects to be one of the major increases in the company's 24-26 profit, and Pan-Energy's gross profit CAGR is expected to reach 19%. The total number of customers covered by the company's 9M24 smart home business reached 4.264 million, an increase of 0.025 million over the same period last year; the company's urban combustion business has connected more than 30 million household customers, and the potential market space for the smart home business is sufficient.

Free cash flow is expected to improve in 24-26, and the dividend payout ratio may still have room to improve

The company's 9M24 capital expenditure is between 45 and 4.6 billion yuan, and the capital expenditure of the urban combustion business is declining steadily; the cash flow contributed by the three major businesses of gas sales/panenergy/smart home is expected to expand. We expect the company's free cash flow to improve in 24-26, and there may still be room for improvement in the core profit dividend ratio.

Profit forecast was lowered slightly, and target price was adjusted based on the 25-year valuation

Taking into account new customers and changes in gas demand, we reduced our 24-26 core profit by 2.5%/3.1%/2.1% to 6.68/7.43/8.23 billion yuan. We adjusted the target price to HK$71.1, based on 10x 2025E PE and the median price of HKD/RMB 0.92 (previous value: HK$72, based on 11x2024E PE), and the target PE is equal to the 3-year dynamic PE average.

Risk warning: LNG import prices are higher than expected; gas sales growth is slowing; global gas markets are shaking sharply.