The Zhitong Finance App learned that Huachuang Securities released a research report saying that after experiencing large fluctuations in upstream natural gas prices in 2021-2022, the procurement costs of urban combustion companies are expected to stabilize. At the same time, the price linkage mechanism continues to improve or push urban combustion companies into a difficult reversal channel. Companies with gas source advantages and core pipeline network assets may have stronger bargaining power in the industry chain. The bank suggests focusing on Xinao Co., Ltd. (600803.SH), China Gas (00384), Jiufeng Energy (605090.SH), and Blue Sky Gas (605368.SH).

The views of Huacheng Securities are as follows:

Natural gas: Low-carbon and clean alternative energy. Policies are favorable to long-term development.

Clean energy, represented by natural gas, has low emissions and is less polluting, and the unit calorific value cost is lower than petroleum fuel. In recent years, China has introduced a number of policies to support the development of natural gas. The “Action Plan for Continuous Improvement of Air Quality” once again emphasizes increasing the substitution of loose coal for civil and agricultural use, implementing clean energy replacement for industrial furnaces, and actively and steadily promoting the replacement of coal with gas.

Profit model: Cost, price, and gas volume are the core profit factors of the gas sales business.

Urban fuel companies generally derive their profits from connectivity, gas sales, and value-added businesses. Affected by the real estate cycle, the number of new connected households has now peaked, and the gas sales business is becoming more and more important. Cost, price, and gas volume are the core profit factors of the gas sales business. Upstream costs have risen sharply in recent years, and poor downstream smooth prices have put pressure on the profits of the gas sales business.

Cost: The comprehensive cost of upstream resources may be declining steadily, and the procurement cost of urban fuel is expected to stabilize.

In 2022, in China's natural gas supply structure, domestic gas fields accounted for about 59% of domestic gas production, 16% of imported pipeline gas, and 25% of imported LNG. 1) Domestic gas: The cost is low and relatively manageable. Increased storage and production are expected to drive production growth. Domestic gas field resources are dominated by three barrels of oil, which is low in cost and highly controllable. Under the action plan to increase storage and production, domestic natural gas production is growing steadily. The Qingran Think Tank expects China's natural gas production to reach 249.3 billion cubic meters in 2025, and the CAGR may reach 4.68% in 2021-2025. 2) Imported pipeline gas: Cost-linked oil prices are expected to fall, and Gazprom contributes to the increase in supply. The cost of imported pipeline gas is slightly higher than that of self-produced gas fields. The average import unit price in 2022 is about 2 yuan/square meter. Among them, the cost of Russian gas is low and relatively stable, and is the main source of the increase in pipeline gas imports.

In addition, the pricing of imported pipeline gas is linked to crude oil, and there is a pricing delay period of October-December, which is expected to steadily decline with the crude oil price center. 3) Imported LNG: The price of sea gas has dropped significantly, and Changxie is expected to fulfill the increase. The offshore gas price center has declined significantly. At the same time, if the production capacity of natural gas liquefaction facilities in the US, Qatar and other countries is put into operation in 2024-2026, it may provide about 21.3% incremental space for global LNG liquefaction capacity (based on 2022). Considering the trend of energy saving and renewable energy substitution, European gas demand continues to be sluggish, and the offshore gas price center may still have stable fundamental support. Furthermore, in 2024-2026, Changxie has executed contracts one after another. Changxie's price is relatively stable, and in recent years it has a certain price advantage over spot goods. The increase in Changxie's share is expected to stabilize LNG import prices. Combining the above factors, the comprehensive cost of upstream resources may have stabilized. Considering that there is no strong expectation catalyst at the present time, in the context of steady growth and consumption promotion, the procurement costs of urban combustion companies may be stabilizing.

Price: The smooth price mechanism is gradually being improved, and the gross margin in gas sales is expected to be fixed.

At the beginning of 2023, the Development and Reform Commission issued a “Letter on the Status of Provision of Upstream and Downstream Price Linkage Mechanisms for Natural Gas” to all provinces and cities, treating natural gas price linkage matters as a priority task. In 2023, many provinces and cities will optimize the upstream and downstream price linkage mechanisms for natural gas, and relax the price linkage conditions to a certain extent. Compared to gas used by non-residents, the gas price adjustment cycle for residents is longer, and cost management has always been relatively difficult. With the steady implementation of good gas prices for residents, the bank estimates that the average price increase for the first tier in 2023 is about 0.256 yuan/square meter (+9.75%, incomplete statistics), which is expected to promote the repair of gas sales margin.

Gas volume: Consumption has returned to positive growth, and the long-term trend of energy transition has not changed.

In 2023, with the return to normal domestic production and life order, demand for gas for public services, commerce, and transportation recovered. At the same time, benefiting from the increase in gas and electricity installations in the region, apparent consumption of natural gas returned to positive growth. In the long run, the share of natural gas in China's energy structure is still far below the world average. Under active policy impetus, there is plenty of room for long-term replacement of natural gas.

Risk Warning: Macroeconomic Fluctuations. Upstream gas prices fluctuate. Policy progress fell short of expectations.