Yuanyu Securities: The expansion of industrial gas volume combined with shareholder synergy leads to simultaneous improvements in gross margin and debt quality, assigning a "Buy" rating to BINHAI INV (02886).

Yuanyu Securities has released a research report stating that BINHAI INV (02886) primarily engages in the sale of pipeline natural gas, engineering construction, pipeline installation, natural gas pipeline transmission, and value-added services. Its business covers eight provinces and two cities in the country, with approximately forty operational units. As of the end of June 2026, the total cumulative users reached about 2.458 million, with about 80% located outside of Tianjin. The income structure is focused on pipeline gas sales: in the first half of 2026, this business accounted for about 96% of main revenue, with sales to industrial and commercial customers and residential users maintaining a ratio of about 80% to 20%. The share of industrial and commercial customers based on gas volume increased from 77% in the same period last year to 79%. This structure is similar to the model of large urban gas companies, which relies on residential users as a base while industrial and commercial users provide incremental growth; however, BINHAI's focus on industrial and commercial sectors is relatively higher, and the percentage of connection fees to profits continues to decline, indicating that fluctuations in gas sourcing costs and industrial demand will more directly affect performance. The institution has given BINHAI INV a "Buy" rating with a target price of HKD 1.30. The main views from Yuanyu Securities are as follows: 1. Shareholding Structure and Shareholder Synergy In terms of shareholding structure, according to the mid-2026 report, Tianjin TEDA Holding holds about 42.41%, and Sinopec holds about 29.68% indirectly through its primary entity. The synergy between these two stakeholders is expected to continue benefiting the companys development. The two major shareholders signed a framework agreement for high-quality development, improvement of the industrial chain, and deepening strategic cooperation in June 2022, May 2023, and March 2026, respectively. The latest agreement covers support for gas sourcing and pricing, equivalent benefits for liquefied natural gas receiving and processing stations, integration of a single network centered around Tianjin Binhai New Area and its periphery, comprehensive utilization of clean energy, and research on carbon asset management. Sinopec agrees to further increase its investment in BINHAI INV and direct strategic resources towards it, with support from TEDA. 2. Mid-2026 Performance: Simultaneous Improvement in Volume and Price Structure BINHAI INVs latest interim performance indicates that the main business revenue reached RMB 2.94 billion, a year-on-year increase of 8.1%; gross profit was RMB 296 million, up 3.0%; net profit for the period was RMB 184 million, an increase of 12.2%; profit attributable to the company's owners was RMB 180 million, up 12.5%, with basic earnings per share at 13.16 cents. Revenue from pipeline gas sales was RMB 2.805 billion, a year-on-year growth of 10.3%, serving as the main driver of growth. The gross profit structure also showed a pattern where "gas sales and value-added services make up for the lag in connection fees": the gross profit from pipeline gas sales was about RMB 209 million, up approximately 18.9%, while gross profit from value-added services was RMB 28.02 million, also an increase of 18.9%. 3. Transformation of Profit Structure: From Connection Fees to Sustained Gas Volume The high-margin connection installation business continues to be suppressed by adjustments in the real estate sector, leading the companys revenue structure to further tilt towards pipeline gas sales, which have lower unit gross margins but a larger scale. In other words, the company is transitioning from relying on one-off profits from connection fees to earning ongoing margins from gas volume, which is a long-term structural transformation. In fact, during this transition period, overall gross margins may face downward pressure; however, as long as unit margins and industrial gas volume can be maintained, the sustainability of profits will actually improve. Additionally, increases in other revenue and decreases in financing costs have also contributed to overall net profit growth. The financing cost during the period fell from RMB 42.19 million to RMB 32.06 million, a 24% decline, which significantly contributed to the 12.5% growth in net profit attributable to the parent company. Overall, the companys operational and financial restructuring seems to be yielding positive results. 4. Gas Volume Performance and Downstream Structure In the first half of the year, BINHAI INV reported a total gas volume of 1.204 billion cubic meters, a year-on-year increase of 5.6%, with pipeline sales gas at 922 million cubic meters, up 11.2%, and pipeline transmission gas at 282 million cubic meters, down 9.5%. According to the National Development and Reform Commission, the total natural gas consumption from January to June 2026 was 206.85 billion cubic meters, a year-on-year decline of 2.4%. This number can be cross-verified through the reports from the Development and Reform Commission and futures research institutions. The increase in pipeline sales gas volume significantly outpaces macro demand, indicating an improvement in market share or customer structure. Among the downstream pipeline sales gas, industrial and commercial customer gas volume increased from 642 million cubic meters to 725 million cubic meters, a growth of 13.0%; residential user volume increased from 187 million cubic meters to 197 million cubic meters, a growth of 5.2%. The proportion of gas sold to industrial and commercial customers rose to about 79%. The top five customers belong to industries such as glass manufacturing, battery separators, power plants, and urban gas companies, clearly indicating an industrial attribute. 5. Margin Structure, Gas Source Structure, and Full-Year Guidance In the first half of the year, the average inclusive gross margin for urban gas was RMB 0.58 per cubic meter, an increase of RMB 0.08 year-on-year; the overall gross margin was RMB 0.45 per cubic meter, slightly up from RMB 0.44 in the same period last year. In terms of gas sourcing structure, the three national oil companies account for 66%, receiving station resources account for 29%, and others account for 5%. The company's strategies for coping with market fluctuations include: expanding the proportion of basic low-priced resources, coordinating procurement from northern and southern resource pools to avoid price discrepancies and high-priced supplementation, moderately holding back on available quotas to replenish when social resource prices drop, and promoting the introduction of non-residential new annual pricing policies for subsidiaries in various regions. These measures explain why, despite the backdrop of "Middle Eastern conflicts driving up international oil and gas prices, coupled with tight domestic imports of liquefied resources," the unit gross margin for urban gas can still expand. The companys annual gross margin guidance for urban gas is RMB 0.51. The management's response is that RMB 0.51 is a conservative forecast, mainly due to potential disruptions from conflicts on future procurement prices for new orders, in addition to a possible warm winter this year, which may result in weaker residential heating gas volume and high-margin structures than anticipated. This explanation is believable. First, the first half of the year saw two procurement policies, with the higher margin portion coming from an increase in lower-priced resources from last year's procurement strategy; if high-priced gas has to be purchased to compensate in the winter, unit gross margins will naturally drop. Second, in the fourth quarter of 2025, the warm winter had already constrained non-trade gas sales, indicating that management's wariness of warm winter effects is not unfounded. Third, setting the guidance at RMB 0.51 essentially incorporates "unfavorable gas prices + unfavorable weather" into the budget; if the actual conditions are better than assumed, there is flexibility for upward revisions in gross margins and profitability. Investors should not take RMB 0.58 as a constant annual target, nor should RMB 0.51 be interpreted as deteriorating company operations; a more reasonable working assumption is that the annual urban gas gross margin will average between RMB 0.51 and RMB 0.55, consistent with slightly better than guidance as a baseline scenario. 6. Value-Added Services: High Margins Supplementing Declining Connection Fees In the area of value-added services, the company experienced an 11.6% increase in revenue and an 18.9% increase in gross profit, with a combined gross margin uplift to 71.9%. The company restructured its existing sales of gas appliances, small installations, non-residential maintenance, and insurance sales into four categories: smart home, home service, extended maintenance, and insurance. According to the companys business review, revenue from smart homes was about RMB 9.46 million, home services about RMB 17.66 million, extended maintenance around RMB 7.48 million, and insurance about RMB 4.39 million, accounting for approximately 24%, 46%, 19%, and 11% respectively. The main contributors to gross profit growth were extended maintenance and smart home services. The slow recovery of the real estate sector has led to a reduction in new housing group orders. The company has shifted to deepen its engagement with existing customers and expand into other areas, including gas appliance supply partnerships with new residential projects in TEDA and becoming a supplier for China National Radio's Tianjin network's home appliances, as well as following up on replacing wall-mounted boilers in Hebei Province and opening its first grid community store in Zhuozhou, Hebei. In March 2026, the wholly-owned subsidiary Taiyuejia also signed a strategic cooperation framework agreement with TEDA, which is a publicly verifiable matter, aligning with the company's gas appliances entering TEDA residential projects. The high proportion of industrial users is not necessarily negative for value-added services. Industrial customers provide stable gas volumes and a strong basis for price negotiations, while also offering entry points for non-residential maintenance, extended services, and comprehensive energy projects; residential users provide the foundation for smart home, insurance, and grid retail services. In the first half of the year, the company added 15,000 new users, including 14,000 residential users, with new industrial connection accounts up 34% year-on-year, bringing the cumulative user total to 2.458 million. The target for annual new connections is 43,000, indicating a need for acceleration in the second half; however, connection fees are no longer the decisive factor for profitability. The concurrent expansion of industrial gas volume and high-margin value-added services allows the company to maintain profit growth even after the decline in connection fees, which is a relatively rare combination among medium-sized urban gas companies. 7. Financial Structure: Debt Not Dramatically Reduced, but Quality Improving On the financial front, at the end of 2025, the groups borrowings were approximately RMB 2.927 billion, with cash and bank deposits of about RMB 189 million. Contract liabilities (advance receipts) common in the urban gas industry can explain part of the liquidity gap. However, the companys interim performance has significantly improved this year, with an average financing interest rate dropping from 4.7% in the first half of 2025 and 4.4% at the end of 2025 to 4.0% in the first half of 2026, a decrease of 40 basis points compared to the end of 2025. The proportion of dollar-denominated debt decreased from 20% in 2025 to 9%, and the proportion of borrowings due within one year fell from 39% at the end of 2025 to 23%. In the first half of the year, the new floating loan rates remained competitive, and the unused loan financing credit was RMB 972 million. Absolute financing costs decreased by 24% year-on-year to RMB 32.06 million; accounts receivable dropped from RMB 221 million to RMB 175 million, a decline of 21%; the debt-to-asset ratio slightly increased from 69.7% to 68.7%. Earnings before interest and taxes increased by 8% year-on-year to RMB 265 million. These changes indicate that while total debt has not seen a dramatic reduction, the cost, currency, and maturity structure have improved, allowing the same assets to generate higher after-tax profits. The company's full-year target also includes further reducing financing costs by RMB 10-15 million and capital expenditures of about RMB 500 million. If the proportion of short-term debt does not rise again in the second half and dollar debt remains in single digits, the improvement in debt quality can be viewed as a mid-term trend rather than a result of financial engineering in a single quarter. 8. 2026 Operational Targets and Progress The companys key targets for 2026 include: total gas sales volume of 2.5 billion cubic meters, with pipeline sales of 1.9 billion cubic meters, a year-on-year increase of approximately 6%, and pipeline transmission of 600 million cubic meters, a year-on-year decrease of about 7%; value-added service gross profit of about RMB 58 million, a year-on-year increase of approximately 15%; capital expenditures of RMB 500 million, with further reductions in financing costs of RMB 10-15 million; and urban gas gross margin of RMB 0.51 per cubic meter; new connections of 43,000. The progress in pipeline sales is approximately 49%, pipeline transmission about 47%, and value-added gross profit around 48% in the first half. Considering that the heating season typically concentrates in the second half, and power plants with equipment failures have resumed production, the volume target is not difficult to achieve; value-added services and connections depend more on execution. 9. Mid to Long-term Options: Green Hydrogen and Photovoltaics The companys mid to long-term investment narrative goes beyond just selling gas. In the green hydrogen sector, wholly-owned subsidiary Binhai Investment Tianjin signed a five-year supply framework agreement in May 2026 with Sinopec Star New Energy Company, centered around the 100,000-ton per year wind-solar hydrogen production project in Ulanqab and the gas transmission pipeline demonstration project for purchasing and blending cooperation. The public announcement timeline is for the 2026 to 2028 period to conduct small-scale full-process trials in the municipal pipeline network, aiming for receiving conditions by the end of 2028, and starting initial annual supplies of about 20,000 to 30,000 tons with preferential pricing from 2029 onwards. In terms of photovoltaics, the non-wholly-owned subsidiary Qiyuan Zhikong is investing in distributed projects in Deqing with a capacity of 3.51 megawatts, which the company expects to be operational within this year. These projects have limited profitability contributions in the near year but align with the industrial synergy of both major shareholders and help redefine the company's growth boundaries under the "dual carbon" policy. Investors should view comprehensive energy as an option rather than a current valuation component. 10. Investment Logic and Valuation Assumptions In summary, the investment logic for BINHAI INV can be articulated as follows: expansion of industrial users and support from shareholder resources as sources of volume, gas sourcing coordination and pricing as sources of gross margin, operational efficiency improvements and debt restructuring as sources of net margin, and a three-year dividend guidance as cash returns during the holding period (with a proposed increase of no less than 10% in dividend per share annually from HKD 0.076 in 2024 for the years 2025-2027), combined with a relative discount of current price to profits and net assets as a safety margin. The premise for this logic is that the second half of the year does not experience a combination of extremely high gas prices and extremely warm winters, and that industrial projects are not treated as one-off growth spikes. The institution assumes that the urban gas gross margin for 2026 will fall within the management's guidance of RMB 0.51 to RMB 0.54 per cubic meter, that industrial gas volume will continue to expand due to the recovery of operational capacity in facilities that experienced failures, and that financial costs will continue to be saved due to declines in dollar debt. Thus, the full-year net profit attributable to the parent company is expected to reach about RMB 245 million, translating to an earnings per share of about HKD 0.21, a growth of about 20% compared to 2025. Considering the liquidity and rating discount typical for small urban gas players, a reasonable price-to-earnings ratio should be around 6.2 to 6.5 times, and a price-to-book ratio around 0.75 to 0.80 times (against a net asset value of about HKD 1.68 per share), corresponding to a 12-month target price of HKD 1.30. Risk Warning International gas prices may rise significantly due to geopolitical conflicts or Middle Eastern wars, compressing unit gross margins for high-priced supplemental gas in winter. Warm winters may suppress residential heating gas volume and high-margin structures; a warm winter scenario was observed in the fourth quarter of 2025, which previously constrained non-trade gas sales. Industrial customer outputs may fall short of expectations, leading to a fallback in external incremental volume; if price discounts occur after a single power plant resumes operations, it could merely reflect a "return to discount" situation. Continuing real estate cycles may lead to declines in connection and new housing orders; fluctuations in interest rates or exchange rates may reverse the improvement in financing costs.