Henan Lantian Gas (605368) 华创证券·2024-03-31 16:00Company Overview - The company is a leading city gas operator in Henan Province, with a business layout covering the midstream and downstream of the gas industry chain [41][87] - The company has a robust midstream pipeline business, leveraging its extensive network of branch pipelines in Henan to sell natural gas to downstream distributors and industrial users [123][145] - The downstream city gas business operates under exclusive franchise rights, distributing natural gas to residential and industrial users in designated areas [128] - The company has a strong track record of revenue and profit growth, with a compound annual growth rate (CAGR) of 9.06% in total revenue and 15.33% in net profit attributable to the parent company from 2018 to 2023 [128] Financial Performance - The company's total revenue increased from 21.25 billion yuan in 2020 to 24.90 billion yuan in 2023, with a CAGR of 4.0% [26] - Net profit attributable to the parent company grew from 607 million yuan in 2023 to an estimated 725 million yuan in 2026, with a CAGR of 5.4% [93] - The company's gross margin for pipeline natural gas business remained stable, ranging from 12.05% to 15.51% from 2020 to 2022 [26] - The company's free cash flow has been strong, with EBIT-adjusted free cash flow increasing from 3.33 billion yuan in 2018 to 6.33 billion yuan in 2023 [19] Industry Analysis - Henan Province has significant potential for natural gas demand growth due to its low urbanization rate and rapid urbanization progress [6][20] - The natural gas penetration rate in rural areas of Henan is much lower than in urban areas, indicating substantial growth potential as rural infrastructure improves [14][165] - The Henan Development and Reform Commission projects that natural gas demand in the province will increase to 200 billion cubic meters by 2025, up from 128 billion cubic meters in 2022 [7][116] - National policies strongly support the development of natural gas as a key bridge in China's energy transition, with targets set for urban gas penetration rates by 2025 [172] Competitive Advantages - The company benefits from its monopoly position in pipeline transportation, which provides strong bargaining power and cost control capabilities [11][123] - The company has diversified gas sources, including stable supplies from PetroChina, Sinopec, and low-cost coalbed methane from Shanxi, which enhances its cost competitiveness [43][179] - The company's strong cost control is reflected in its stable gross margins for midstream pipeline business, which increased from 0.16 yuan/cubic meter in 2020 to 0.45 yuan/cubic meter in 2022 despite rising upstream costs [9][124] - The company's asset turnover efficiency is high, with accounts receivable turnover and inventory turnover rates consistently outperforming industry averages [114] Future Outlook - The company has announced a generous dividend policy, committing to a dividend payout ratio of at least 70% for the next three years (2023-2025) [3][53] - The company's IPO and convertible bond projects are expected to bring additional growth, with most IPO projects already reaching their intended use and convertible bond projects set to be operational by 2024-2025 [62][75] - The company's downstream city gas business is expected to benefit from price adjustments in residential gas tariffs, with potential for further price increases in other cities following the lead of Xuchang City [45][104] - The company's profit is expected to be further boosted by the resumption of coalbed methane supply, with a potential profit increase of 0.55 billion yuan if 2.5 billion cubic meters of coalbed methane is supplied [44][181] Valuation and Recommendations - The company is expected to achieve revenue of 51.64 billion yuan in 2024, with a year-on-year growth of 4.39%, and net profit attributable to the parent company of 6.65 billion yuan, with a year-on-year growth of 9.73% [53][75] - The company's 2024 estimated PE ratio is 15x, with a target price of 14.40 yuan, based on its stable operations, high dividend policy, and strong performance in 2023 [75][92] - The report recommends a "Buy" rating for the company, citing its strong midstream cost control, potential profit growth from coalbed methane supply, and downstream business expansion [75][92]