CICC: Maintaining Xinao Energy's (02688) “Outperform the Industry” rating target price of HK$70

The Zhitong Finance App learned that CICC released a research report stating that it maintains Xinao Energy's (02688) “outperforming the industry” rating, the 2024/2025 profit forecast remains unchanged, and the target price is HK$70. Xinao Energy announced on September 23 that the $100 million reward share purchase plan announced in September 2023 has been implemented. The company plans to use no more than HK$300 million to continue to repurchase the company's shares for employee rewards; in addition, the company plans to use no more than HK$300 million to repurchase shares of listed companies and cancel them.

CICC's main views are as follows:

Continued promotion of share repurchases has positive signal significance.

In addition to adding no more than HK$300 million to repurchase shares for employee rewards, the company implemented a cancellation repurchase of no more than HK$300 million for the first time. The bank believes that management has shown a positive attitude towards the company's long-term value to the market.

The 2024E dividend ratio is highly attractive, and there is still plenty of room for improvement in dividend payout capacity in the medium to long term.

Under the current stock price, Xinao Energy's 2024E dividend yield is about 5.9%. The bank believes it is already highly attractive to long-term investors. Furthermore, based on the current development of the urban gas industry, the bank believes that the capital expenditure scale of medium- to long-term companies may be lowered to 5-6 billion yuan/year, the capital expenditure scale will be reduced and the profitability of the natural gas retail business will be improved, or the company's free cash flow will be raised to 6-7 billion yuan/year in the medium to long term. The bank believes that there is still plenty of room for improvement in the company's medium- to long-term dividend payment capacity.

The return of utility attributes and the increase in dividend payment capacity may favor the upward shift in the medium- to long-term industry valuation center.

The bank believes that since 2H21, the urban combustion industry's valuation has been systematically downgraded from 15-20x P/E to about 8-10x P/E currently due to market expectations: 1) the cyclical strengthening of the business model of urban combustion companies due to poor cost transmission; 2) the connectivity business will continue to be under pressure due to the decline in the real estate cycle.

At this point, the bank believes that: 1) Benefiting from the increase in commercial gas surplus prices and the return of natural gas prices to a reasonable range, the utility attributes of gas companies are gradually returning. 2) As the real estate industry is still under pressure, most gas companies have made strategic adjustments. By reducing the scale of expansionary capital expenditure and emphasizing increasing the return level of stock projects, it is expected that free cash flow and the scale of dividends will increase steadily. The bank believes that in the medium term, the return of utility attributes and the increase in dividend payment capacity are expected to drive the gas company industry's valuation center back to around 15x P/E.