The company's recent situation

Xinao Energy announced on September 23 that the 0.1 billion dollar reward share purchase plan announced in September 2023 has been implemented. The company plans to use no more than HK$0.3 billion to continue to repurchase the company's shares for employee rewards; in addition, the company plans to use no more than HK$0.3 billion to repurchase shares of listed companies to cancel.

reviews

Continued promotion of share repurchases has positive signal significance. In addition to adding an amount of no more than HK$0.3 billion to repurchase shares for employee rewards, the company implemented a cancellation repurchase of no more than HK$0.3 billion for the first time. We believe that management showed a positive attitude towards the company's long-term value to the market.

2H24 improves momentum and gross margin or helps repair short-term valuations. Xinao Energy is currently trading at 2024E about 7.4x P/E, with a 20-30% valuation discount compared to companies such as China Resources Gas. We believe that the company's low valuation is mainly due to the current macro environment, and the market is concerned about the company's natural gas retail business profit situation. Looking ahead, we believe that 2H24's gas retail business volume (2H24E +5-6% YoY vs 1H24 +4.5% YoY) and gross margin (2H24E 0.54-0.56 yuan/square vs. 1H24 0.54 yuan/square) is still expected to improve month-on-month, and there is room for repair in the short-term company's valuation.

The 2024E dividend ratio is highly attractive, and there is still plenty of room for improvement in dividend payout capacity in the medium to long term. Under the current stock price, Xinao Energy's 2024E dividend yield is about 5.9%, which we believe is already highly attractive to long-term investors. Furthermore, based on the current development of the urban gas industry, we believe that the capital expenditure scale of medium- to long-term companies may be lowered to 5-6 billion yuan/year, the capital expenditure scale will be reduced and the profitability of the natural gas retail business will be improved, or the company's free cash flow will be raised to 6-7 billion yuan/year in the medium to long term. We believe that there is still a lot of room for improvement in the company's medium- to long-term dividend payment capacity.

The return of utility attributes and the increase in dividend payment capacity may favor the upward shift in the medium- to long-term industry valuation center. We believe that from 2H21, the urban fuel industry's valuation was systematically downgraded from 15-20x P/E to about 8-10x P/E currently due to market expectations 1) the cyclical strengthening of the business model of urban combustion companies due to poor cost transmission; 2) the connection business will continue to be pressured by the downturn in the real estate cycle. At this point, we believe that 1) Benefiting from the increase in the commercial gas price ratio and the return of natural gas prices to a reasonable range, the utility attributes of gas companies are gradually returning. 2) As the real estate industry is still under pressure, most gas companies have made strategic adjustments. By reducing the scale of expansionary capital expenditure and emphasizing increasing the return level of stock projects, it is expected that free cash flow and the scale of dividends will increase steadily. We believe that in the medium term, the return of utility attributes and the increase in dividend payout capacity are expected to drive the gas company industry valuation center back to around 15x P/E.

Profit forecasting and valuation

The profit forecast for 2024/2025 remains unchanged. The current stock price corresponds to 2024/2025 7.4x/6.6xp/E. Maintaining an outperforming industry rating and a target price of HK$70, corresponding to 2024/2025 10.3x/9.2xP/E, with 40.0% upside compared to the current stock price.

risks

Natural gas prices fluctuated greatly, and residents' smooth price progress fell short of expectations.