2024H1 Xinao Energy's revenue increased year-on-year, and net profit declined. In the first half of 2024, the company achieved revenue of 54.587 billion yuan, a year-on-year increase of 0.9%; net profit of 2.573 billion yuan, a year-on-year decrease of 22.8%; domestic basic business core profit of 3.08 billion yuan, an increase of 9.5%; and basic earnings per share of 2.29 yuan, a year-on-year decrease of 0.66 yuan. In terms of profit margins, due to the reduction in the company's opportunities in the international market and the downturn in the engineering installation business due to the decline in domestic real estate forms, the company's profit margins all declined year-on-year. Gross margin reached 11.84%, down 1.38 pcts year on year; operating profit margin reached 7.15%, down 2.59 pct year on year; net margin reached 4.71%, down 1.45 pct year on year.

The natural gas business continues to grow, and the company further expands its natural gas market share and customer base. Xinao Energy achieved steady growth in the natural gas business segment in the first half of 2024. Retail gas volume increased 4.5% year-on-year to 12.71 billion cubic meters, indicating continued growth in market demand. It should be noted that industrial and commercial retail sales increased 5.4% year over year, and their share expanded to 75.2%. Through innovative models and technology applications, the company has successfully developed new industrial and commercial users. Daily gas volume reached 7.262 million cubic meters, adding 0.775 million household users, indicating that the company has achieved remarkable results in expanding its customer base. In addition, the company is actively promoting gas price adjustments for residents. By the end of July 2024, a total proportion of residential gas volume price adjustments had reached 59%, which helped improve profitability.

Pan-Energy and Smart Home businesses have grown significantly, and their share of gross profit has increased. The Pan-Energy business achieved sales volume of 19.74 billion kilowatt-hours during the reporting period, an increase of 26% year over year, and gross profit increased 23% year over year, reaching 1.4 billion yuan. The gross profit of the Smart Home business increased 23% year over year, the number of trading customers increased to 2.683 million, and the customer unit price increased to 325 yuan/household. The company promoted business upgrading through deepening digital intelligence applications and achieved rapid growth in the Pan-Energy business. The gross profit of the Smart Home business is expected to increase by 20%-30% in the second half of the year.

The debt structure has been optimized, and financing costs have been reduced. By repaying part of the loan and repurchasing US dollar bonds, the company reduced its total debt while maintaining a good credit rating, which provided a solid financial foundation for the company's future investment and expansion. The company will continue to monitor market conditions and flexibly adjust financing strategies to support its business growth and shareholder returns. Specifically, the company's net debt ratio fell from 25.3% to 24.3% in the first half of 2024, showing the company's efforts to reduce financial leverage.

Valuation forecasts and investment suggestions: Looking ahead to 2024, we believe that due to the macro and industry environment, the decline in the company's new connections will still have a negative impact on future profits, but the overall operation of the company is relatively steady. Based on the company's performance, we maintain the company's FY24-26 main operating income forecast of 122.475/132.386/143.859 billion yuan, corresponding net profit to mother of 8.134/8.633/9.357 billion yuan, and a target price of 73.99 HKD/share, maintaining a “superior to market” rating.

Risks: macroeconomic policy risk; risk of natural gas price fluctuations; risk of terminal demand falling short of expectations.