Event: The company released its 2016 annual report. In 2016, it achieved revenue of 7.211 billion yuan, an increase of 6.19% over the previous year; net profit of 509 million yuan, a year-on-year decrease of 13.26%, lower than Shenwan Hongyuan's expectations (previously estimated at 613 million yuan). The company plans to pay 1.5 yuan in dividends (tax included) for every 10 shares, and the dividend amount accounts for 32.77% of the mother's net profit. The company released its 2017 quarterly report. It achieved current revenue of 2,662 billion yuan, an increase of 5.17% over the previous year; net profit of 220 million yuan, a decrease of 35.52% over the previous year, in line with Shenwan's expectations. Key investment points: gas sales volume increased steadily, and profit declined year-on-year due to lower management and transportation costs. In 2016, the company sold 5.21 billion square meters of gas, an increase of 9.73% over the previous year; of these, the sales volume of urban gas was 262 million square meters, an increase of 14.08% over the previous year. In October 2016, Shaanxi Province lowered gas pipeline transportation costs for non-residents by 0.121 yuan/square meter (a decrease of 27%), which had an impact on the company's overall profitability. The company's comprehensive gross margin in 2016 was 12.40%, a decrease of 2.85 percentage points from the previous year. The comprehensive gross profit margin of 2017Q1 company was 12.95%, which remained low. As one of the main gas sources in China, gas pipeline prices in Shaanxi Province are at a low domestic level. There is limited room for future reductions, and the company's profitability is expected to stabilize. It is proposed to increase the scale of pipeline network assets and enhance gas sales capacity. The company issued a fixed increase plan in December 2016, and plans to raise 1.5 billion yuan for the Han'an Line and Zhonggui Line gas pipeline project, Shangluo to Shangnan gas pipeline project, Meixian to Longxian gas pipeline project, Shangluo to Luonan gas pipeline project, and Ankang to Xunyang gas pipeline project. After the fund-raising project is put into operation, the company will add 488 kilometers to the existing 3300-kilometer long-distance pipeline, increasing the annual gas transmission capacity from 13.5 billion meters to 14.5 billion meters. Benefiting from gas reform and coal-to-gas conversion, gas sales are expected to continue to grow, and gas value-added tax cuts will enhance the company's profitability. Currently, oil and gas reforms are being carried out steadily. The company is located in Shaanxi, which is rich in oil and gas resources. The price of upstream gas resources is expected to drop further in the future, which is beneficial to downstream gas demand. In 2017, Shaanxi Province vigorously promoted the “1+9” action plan to combat haze. Among them, the special coal reduction action plan calls for vigorous promotion of coal-to-gas, coal-to-electricity, and coal-to-heat projects. The implementation of coal-to-gas is expected to drive a further increase in downstream gas demand. The company's gas sales volume is expected to grow steadily in the future, and the revenue scale will continue to expand. Furthermore, according to the latest national regulations, starting from July 1 this year, the value-added tax rate for the natural gas industry will be lowered from 13% to 11%, reducing the corporate tax burden. The company's profitability and gas sales scale are expected to benefit both. Profit forecast and rating: Taking into account the reduction in management fees and the adjustment of the value-added tax rate, we adjusted our net profit forecasts for 17-19 to 3.76, 4.30, and 504 million yuan (the performance forecasts for the 17 and 18 years before adjustment were 628 million yuan and 689 million yuan). The corresponding earnings per share were 0.34, 0.39, and 0.45 yuan/share, respectively. The PE corresponding to the current stock price is 27 times, 23 times and 20 times, respectively. We believe that the company, as the leader of the Shaanxi pipeline network, is expected to benefit from the increase in consumption brought about by falling gas prices and the advancement of natural gas market-based reforms in the future. Maintain a “buy” rating.