As a leading natural gas provider in Henan Province, Lantian Gas has ranked first in the province by gas transmission volume in recent years.

Lantian owns core long-distance pipeline network assets in the province and has been actively acquiring and constructing township projects after its listing, which will allow it to benefit from the "gasification of Henan" initiative and, therefore, warrant plenty of room for growth in the future. Its outstanding advantage of integration has translated into a higher dollar margin for pipeline gas and a stable dollar margin for city gas in the context of high gas prices, while market-oriented pricing that allows cost pass-through at the resident end may further improve the stability of its city gas dollar margin. Lantian has abundant free cashflow and pays high dividends to share value with shareholders. We see it as a stock with high dividend payouts and a wide margin of safety in valuation. We assign 14x 2023E PE (or 2.2x 2023E PB) to derive a target price of Rmb12 and initiate coverage with a "BUY" rating.

A city gas leader in Henan with steady earnings growth & stellar ROE: Lantian is a leading natural gas provider in Henan Province, mainly engaged in pipeline networks and city gas, and its gas transmission volume has ranked first in Henan for many years. Lantian's 2017-2022 CAGR of revenue and attributable net profit (ANP) reached 14% and 22%, respectively, with its operating cashflow being abundant and growing year by year, while its return on equity (ROE) was stable in the range of 15%-20% in the past five years.

As domestic city gas consumption bottomed out and rebounded, market-oriented pricing for residents will restore city gas earnings.

Looking ahead, we expect the domestic gas consumption growth rate in 2023 to rebound to 8% in the context of international gas prices heading downward amid volatility and the domestic economy poised for a steady recovery. We expect gas consumption in China to grow at a CAGR of 6% in 2023-2025.

Coming into 2023, many places have introduced mechanisms to link upstream and downstream natural gas prices, with price adjustments at Rmb0.13-0.40 per cube meter. This may address pain points for market-oriented gas pricing at the resident end, helping city gas profitability recover.

The pipeline network + city gas model has outstanding advantages, and its development accelerated significantly after the listing.

Lantian owns four long-distance pipeline networks of nearly 500 kilometers, which are connected to several trunk lines such as the West-East Natural Gas Pipeline 1 and 2 to warrant good connectivity. Lantian's city gas projects mainly source gas from its own pipelines, highlighting its edge in upstream and downstream synergies. With a variety of complementary gas sources and its integration advantages, Lantian has delivered a higher dollar margin for pipeline gas and a stable dollar margin for city gas in the high gas price environment. In 2022, its dollar margin for pipeline gas rose by 55% YoY, while that of city gas rose by 14% YoY. After the listing, Lantian accelerated the acquisition of city gas projects via M&As, and as a result, its city gas sales volume in 2022 increased by as high as 34% YoY. According to the "Urban　　and Rural Construction Statistical Yearbook" of the Ministry of Housing and Urban-Rural Development (MOHURD), city gas coverage in the rural areas of Henan Province was only 24% in 2021. Lantian's IPO-funded projects will allow it to tap the vast market of townships, boding well for sustained growth in its city gas business.

Lantian shares value with shareholders through high dividend payouts, and we forecast a dividend yield of 6.4%/6.9%/7.7% in 2023E-2025E.

Lantian has a stable city gas business model, and its midstream and downstream integration provides additional assurance of stability, which has allowed its cashflow from operating activities to grow steadily. The Company consistently shares value with shareholders through high dividend payouts, with historical dividend payout ratios maintained at high levels, or as high as 84% in 2022. Its dividend yield for 2022 is as high as 7.2%. We expect the Company's free cashflow to remain sound, with 2023E-2025E dividend yields likely at attractive levels of 6.4%/6.9%/7.7%, respectively.

Potential risks: Slower natural gas demand growth; slower-than-expected residential gas price rationalization; fewer-than-expected new connections; lower-than-expected returns from rural projects; early termination or non-renewal of the Company's concessions.

Investment recommendation: As projects funded by proceeds from its initial public offering (IPO) are put into operation, the number of household connections and gas volume rise, and the dollar margin of city gas stabilizes, we expect the Company to deliver 2023E-25E ANP of Rmb602mn/653mn/723mn (implying YoY growth of 2%/8%/11%), equivalent to EPS forecasts of Rmb0.87/0.94/1.04 and corresponding to 12x/11x/10x PE at the current stock price. Taking into account the average valuation of 13x 2023E PE and 1.7x 2023E PB based on Wind consensus estimates for comparable peers, namely Top Resource Energy (300332.SZ), Xintai Natural Gas (603393.SH), and Blue Flame Holding (000968.SZ), and considering the Company's outstanding position as a regional leader, stable profitability, sound growth prospects, and margin of safety from its low valuation and high dividend payouts, we give the Company a certain valuation premium and assign 14x 2023E PE (or 2.2x 2023E PB) to derive a target price of Rmb12 and initiate coverage with a "BUY" rating.