Core earnings for the first half of the year were in line with expectations, with Panenergy and Smart Home segments showing outstanding growth. Xinao's core profit for the first half of 2024 fell 16.6% year on year to 3.26 billion yuan (RMB, same below), in line with our expectations. Excluding LNG trade profit of 0.18 billion yuan (1.1 billion yuan in the first half of 2023), domestic core profit increased 9.5% year-on-year to 3.08 billion yuan. It is worth noting that the company's Changsha project did not have consolidated statements during the period, which slightly reduced retail sales volume and revenue/gross profit from the connection project in the first half of the year.

During the period, the company's retail gas volume increased 4.5% year on year, and the gross margin of gas sales improved to 0.54 yuan per party (0.52 yuan in the same period last year). In the first half of the year, the company's pan-energy and smart home business increased 17%/23% year-on-year to 1.07 billion/1.4 billion yuan, respectively, surpassing the gross profit of the segment during the connection project period of 0.82 billion yuan.

The share of Pan-Energy and Smart Home divisions increased to optimize the stability of the company's profit structure. In 2024, we expect the company's retail gas sales to rise 5% year on year. The gross margin of gas sales for the whole year will be 0.54 yuan per party with a year-on-year increase in net price, and segment gross profit will increase 11% year on year. In terms of Pan-Energy's business, we understand that the management's 20-30% year-on-year growth target should include joint ventures and joint ventures. Having reached a high base in the second half of last year, we expect the company's Pan-Energy sales to increase 15% year-on-year in the second half of this year. As for the smart home business, management estimates that the company will continue to grow in terms of the number of C-side customers and unit prices, and that the basic kitchen scenario, gas safety and beauty decoration business should maintain high growth in the second half of the year. We estimate that the gross profit of the smart home division of the company will increase by 21%/19% year-on-year in 2024/25. We expect the share of connectivity projects in the company's gross profit structure to drop to 14%/13% in 2024/25, while the combined share of Pan-Energy and Smart Home divisions will rise to 37%/40%, improving the stability of the company's profit structure.

Profit will return to an upward trajectory next year, and there is support for the increase in valuation, and it will be raised to buying. We raised the company's 2024/25/26 profit forecast by 0.2%/1.5%/2.3% to reflect the company's better-than-expected gross profit from gas sales and the gross profit growth of the Smart Home division. It is expected that the company's overall core profit in 2024 will still fall 9.8% year on year due to LNG trade last year, but will return to 10.6%/10.0% year-on-year growth in 2025/26.

We are still using the projected price-earnings ratio of 9 times in 2025 as the valuation standard, and the target price was raised to HK$65.1 (previously HK$64.1). Since the company's current profit structure has stabilized, and next year's profit growth is more visible, we believe that this interim report can support the company's valuation increase and upgrade the rating to buying.