The Zhitong Finance App learned that Huachuang Securities released a research report saying that on March 15, the Shenzhen Development and Reform Commission issued a notice on the joint adjustment of pipeline gas sales prices throughout the city. After this joint adjustment, the first tier price of pipeline gas for residents in Shenzhen increased by 10%, and the benchmark sales price for industrial and commercial gas was increased by 7.77%. The bank believes that in recent years, due to factors such as large fluctuations in natural gas procurement costs and repeated epidemics, the valuation level of the urban combustion industry has declined significantly. As of March 15, 2024, the gas III (Shenwan) index PE (TTM) was only 16.89, which is at the 12% quantile since 2021. The valuation of the gas industry may have a lot of room for repair. The valuation of the urban combustion industry may increase in anticipation of improvements in gas sales margins such as favorable prices and stabilizing costs.

Matters: On March 15, the Shenzhen Development and Reform Commission issued a notice on the joint adjustment of pipeline gas sales prices throughout the city. After the joint adjustment, the first, second, and third tier sales prices for Shenzhen pipeline natural gas were adjusted to 3.41/3.91/5.16 yuan/cubic meter respectively; the benchmark sales price for industrial and commercial gas was 4.3 yuan/cubic meter, and gas companies can negotiate with users to determine the specific price within a 20% increase and an unlimited drop.

The views of Huacheng Securities are as follows:

After this joint adjustment, the first-tier price of pipeline gas for residents in Shenzhen increased by 10%, and the benchmark sales price for industrial and commercial gas increased by 7.77%.

According to the notice of the joint adjustment of pipeline gas prices, after the joint adjustment, the first, second, and third grade pipeline gas prices for residents in Shenzhen all increased by 0.31 yuan/square meter, with increases of 10.00%/8.61%/6.39% respectively; after the joint adjustment, the benchmark sales price of industrial and commercial gas in Shenzhen increased by 0.31 yuan/square meter, an increase of 7.77%. This price linkage adjustment may be to channel the higher procurement costs of urban combustion companies in the early stages. According to the notice, from October 2021 to October 2023, the average procurement cost of Shenzhen Gas Group was 3.0498 yuan/cubic meter (tax included). This joint adjustment was 0.31 yuan/m3, and it was approved to use the average procurement cost of 2.4061 yuan/cubic meter (tax included) as the base period cost for the upstream and downstream price linkage mechanism in the future.

The smooth price of natural gas is “one more city”, and the gradual implementation of favorable price work is expected to promote the repair of urban fuel gaps.

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. Since 2023, many provinces and cities have optimized the upstream and downstream price linkage mechanisms for natural gas, and relaxed the price linkage conditions to a certain extent. With the steady implementation of the residents' gas price promotion work, the average price increase of the first tier since 2023 is about 0.259 yuan/square meter (+9.76%, incomplete statistics). Gas prices in Shenzhen are high and industry and commerce are well developed. The implementation of the smooth price work may have some exemplary significance. We look forward to the continuous implementation of the smooth price work to fix the gap in urban gas sales.

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

China's upstream natural gas resources include domestic natural gas, imported pipeline gas, imported LNG, etc., accounting for about 59%/16%/25% of these resources in 2022, respectively. Among them, the cost of domestic natural gas is low and stable and controllable, and increased storage and production is expected to drive production growth; oil prices linked to imported pipeline gas have a pricing delay period of 10-12 months, and the price may fall as oil prices fall; in terms of imported LNG, the price of marine gas has declined significantly, and the increase in the volume of imported LNG resources is expected to stabilize the comprehensive price of imported LNG resources. The comprehensive cost of upstream natural gas resources may have declined steadily. Considering the lack of strong expected catalysts at the present time, in the context of steady growth and consumption promotion, the procurement costs of urban combustion companies may be expected to stabilize, and urban combustion may be expected to enter a difficult reversal channel.

The current valuation of the gas industry is undervalued, and there may be a lot of room for repair if the gross margin in gas sales is expected to improve.

In recent years, due to factors such as large fluctuations in natural gas procurement costs and repeated epidemics, the valuation level of the urban combustion industry has declined markedly. As of March 15, 2024, the gas III (Shenwan) index PE (TTM) was only 16.89, which is at the 12% quantile since 2021. The valuation of the gas industry may have a lot of room for repair. The valuation of the urban combustion industry may increase in anticipation of improvements in gas sales margins such as favorable prices and stabilizing costs.

Investment advice:

In terms of fundamentals, after experiencing large fluctuations in upstream natural gas prices from 2021 to 2022, the procurement costs of urban combustion companies are expected to stabilize, and at the same time, continuous improvement of the price linkage mechanism is expected to promote the repair of urban combustion companies' gross margin.

In terms of valuation, the current valuation of the gas industry is undervalued, and there may also be some room for repair if the gross margin in gas sales improves. The bank suggests focusing on Xinao Co., Ltd. (600803.SH), China Resources Gas (01193), Kunlun Energy (00135), China Gas (00384), and Jiufeng Energy (605090.SH).

Risk warning: macroeconomic fluctuations, fluctuations in natural gas procurement costs, falling short of expectations in the promotion of favorable price policies