Action

We cut our TP by 18% to Rmb18 (28x 2017e P/E, 1.9x2017e P/B), and downgrade from BUY to HOLD.

Reasoning

2Q16 results below expectations. 1H16 revenue down 4%YoY to Rmb1.1bn and NPAT down 8% YoY to Rmb130mn, orRmb0.27/sh. 2Q16 revenue down 22% YoY to Rmb480mn, andNPAT down 30% YoY to as low as Rmb47.7mn, below ourexpectations.

Cost control and working capital. Despite the revenuedecline in 2Q16, selling expenses rose 17% YoY to Rmb11.7mn.The company has incurred A/R impairment loss in most reportingquarters since 2014, and the accumulated loss is up toRmb27.4mn as of the end of June. On the other hand, the A/Rbalance increased for a second consecutive quarter in 2Q16 andA/R turnover rose from 43 days at end-2015 to the current 62.

M&A progress delayed. After the termination of theacquisition of Chuzhou Jinda Petroleum Ltd, the company hasbeen suspended from being involved in any major assetrestructuring activities before mid-October, according to the rulesof the Shenzhen Stock Exchange.

Earnings forecast and valuation

Considering the weaker-than-expected 1H16 results andslowdown in external expansion, we cut 2016 & 2017 EPSforecasts by 35% & 40% to Rmb0.57 & Rmb0.65. Cut TP18% to Rmb18 (28x 2017e P/E, 1.9x 2017e P/B), anddowngrade the company from BUY to HOLD.

Risks

Weak demand for natural gas; pipeline tariff cuts; non-residentialcity-gate gas price hikes; further slowdown in externalexpansion; dilution of existing shareholders from potential equityfinancing.