Haitong International released a research report stating that it maintained the “superior to the market” rating of Xinao Energy (02688) and adjusted the company's main operating income of 1224.75/1323.86/143.859 billion yuan in FY24-26, respectively. The corresponding net profit to mother was 81.34/86.33/9.357 billion yuan, and the target price was reduced by 21% to HK$73. Looking ahead to 2024, the bank believes 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 company's overall operation is relatively steady.

Haitong International's main views are as follows:

The operating margin increased slightly in 2023, and the expense ratio declined during the period.

In 2023, the company achieved revenue of 113.86 billion yuan, up 3.5% year on year; gross margin reached 12.6%, down 1.7 pct year on year; operating profit margin reached 9.4%, up 0.4 pct year on year; net profit reached 6.0%, down 0.7 pct year on year; and core profit of 7.586 billion yuan, down 4.8% year on year, mainly due to a 36% drop in overseas LNG sales related business. On the cost side, the company's expense ratio continued to decline year by year, reaching 5.36% during 2023. The growth rate of the gas retail business and pan-energy business slowed due to macroeconomic and climate change factors. Natural gas sales increased 2.8% year on year to 33.621 billion cubic meters, of which retail gas volume fell 3.1% year on year to 25.144 billion square meters. In terms of solvency, the company maintains a relatively low average financing cost of 3.53%, which can guarantee the continuous development of the company's business.

The company's various business segments are diversified, and the Pan-Energy business and Smart Home business are the main growth points.

Natural gas retail revenue increased 0.8% year over year to 60.57 billion yuan, Panenergy business revenue increased 32.5% year over year to 14.51 billion yuan, and smart home business revenue increased 21.9% year over year to 3.76 billion yuan.

The number of new development users has declined, and the engineering installation sector is clearly under pressure.

The company's engineering revenue in 2023 fell sharply by 10.3% year on year to 5.34 billion yuan. The number of new household users and industrial and commercial users decreased by 11.1%/15.0% year on year to 1,853,800 households/18,700 households respectively, far below the levels of 2021 and 2022. The company expects to add 140-1.6 million new residential users in 2024, and retail sales are expected to increase by more than 5%. According to the macroeconomic environment and other influences, the bank believes that the number of new development users of the company may continue to shrink in 2024, and the sensitivity of the company's profits to costs will increase.

Cash flow continues to improve, and dividend payout ratios continue to rise.

The company's operating cash flow in 2023 reached 9.612 billion yuan, of which free cash flow was 2,132 billion yuan. At the same time, the number of revenue and payment days continued to be optimized to 12 days. Long-term stable cash flow provides a certain guarantee for shareholders. In 2023, the company's dividend ratio increased by 37% to 40% year-on-year, and the dividend per share was HK$2.95. Thanks to the steady growth of the company's main business, it is expected that the company's dividend payout ratio will still have some room to rise in 2024, and its growth rate may remain at 3%-4% per year.

In response to the country's “dual carbon” strategy, new quality productivity has spawned new demand.

At the management level, the company provided “Dutch source network storage” to expand its multi-product business, and the company's internal rate of return reached 12.6%; at the environmental level, the company's carbon emission intensity decreased by 28.5% compared to 2019; at the social level, the company continued to promote business intelligence to achieve immediate monitoring, early warning and evaluation of production safety, and the work-related injury rate dropped to 0.4 per million hours. ESG Digital Intelligence Construction has completed the launch of the digital intelligence system to achieve a fully closed loop of ESG data management. MSCI's ESG rating was upgraded from BBB to A, and the rating jumped for two consecutive years, making it the highest rating in the A-share gas industry.

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