1H24 core profit yoy -17%, adjusted profit forecast and target price

Xinao Energy released an interim report. 1H24 achieved revenue of 54.6 billion yuan (yoy +0.9%), core profit of 3.263 billion yuan (yoy -17%), its domestic YOY +9% /overseas LNG yoy -83%; natural gas retail volume yoy +4.5%, Pan-Energy sales yoy +26%, smart home profit yoy +23%, and 0.775 million new connections (yoy -22%). Taking into account new customers and changes in gas demand, we slightly adjusted our core profit for 24-26 to 6.85/7.66/8.41 billion yuan (previous value: 7.01/7.65/8.34 billion yuan). We adjusted the target price to HK$72, based on 11 times the 2024 forecast PE and the latest HKD/RMB exchange rate of 0.92 (previous value: HK$88, based on 13 times the 2024 forecast PE), and the target PE is equal to the 3-year dynamic PE average. 1H24 plans to pay HK$0.65 per share, with a core profit dividend payout ratio of 20.6% (yoy+3.6pp); the company's target dividend ratio for 2024 is 44% (yoy+4pp), which corresponds to an expected dividend rate of 5.3%. We expect the company's free cash flow to dividend ratio to increase in 24-26 to maintain “buying.”

Retail gas sales have resumed growth. The retail price spread has benefited from the net price reduction and the reduction in the company's 1H24 retail gas revenue/gross profit yoy +3.0%/+7.4%, thanks to the resumption of gas volume growth, the decline in natural gas procurement costs, and the continuous implementation of normal prices. The company's 1H24 gas retail sales volume yoy +4.5% to 12.7 billion square meters; of these, industrial and commercial yoy +5.4%, and residential yoy +3.1%. Taking into account new customers and changes in gas demand, we expect the company's retail gas volume growth rate to be +5.6%/+5.3%/+4.6% in 24-26. By the end of July, the company had completed a total of 59% of residential gas price adjustments; we expect the 24-26 price difference to be 0.54/0.55/0.55 yuan/square meter. The company's 1H24 connected 0.775 million new households (yoy -22.3%), and the company expects 2H24 to complete 0.7 million households.

Pan-energy's business grew rapidly. C-end customers led the smart home business growth of the company's 1H24 Pan-Energy business revenue yoy +17.6% to 8.2 billion yuan, gross profit yoy +17% to 1.07 billion yuan, and sales volume yoy +26% to 19.74 billion kilowatt-hours. As of the end of June, the company had 332/72 projects in operation/under construction, and we expect these projects to be one of the major increases in the company's profit over 24-26 years.

The company's 1H24 smart home business revenue yoy +22.4% to 2.1 billion yuan, gross profit yoy +23% to 1.4 billion yuan, including C-side revenue yoy +38% to 0.87 billion yuan, number of trading clients yoy +5.2% to 2.683 million households, and customer unit price yoy +32% to 325 yuan/account, thanks to the continuous upgrading of the company's smart home business products and services.

Free cash flow is expected to improve in 24-26. The dividend payout ratio may still be upward. The net operating cash flow of 1H24 is 3.43 billion yuan (yoy -14%), capital expenditure is 2.74 billion yuan (yoy -20%), and free cash flow reaches 0.63 billion yuan (yoy +53%). The capital expenditure of the company's urban fuel business is declining steadily, and the cash flow contributed by the three major businesses of sales, pan-energy, and 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.

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