1H21's recurrent profit increases by 29%, maintaining "buy"
On August 31, Beijing Holdings reported 1H21 results: revenue rose 26% year-on-year to HK $40.4 billion, while recurrent profit rose 29% to HK $4.6 billion. The main operating indicators include: 1) gas sales in Beijing increased by 6% compared with the same period last year; 2) the gas output of Beijing Pipeline Company increased by 26.8 billion cubic meters (up 2% from the same period last year); 3) the net profit contribution of China Gas (384 HK) increased by 26% year-on-year to HK $1.3 billion; 4) the net profit of the water business increased by 7% over the same period last year. In view of the increase in gas sales and the increase in investment income of the joint venture, we have raised our 2023 net profit forecast to HK $84 million and HK $83.4 for BPS. We maintain our "buy" rating, lowering our target price by 12% to HK $41.12, corresponding to 0.57 times the 2021 forecast PB, in line with the average PB over the past three years.
Total natural gas sales of 1H21 increased by 6% year-on-year.
Total 1H21 natural gas sales in Beijing rose 6 per cent year-on-year to 9.5 billion cubic metres, while domestic sales in Beijing rose 4 per cent to 8.9 billion cubic metres, mainly driven by a recovery in natural gas demand. We expect gas sales in Beijing to grow by 5% in 2021, and the rapid rise in costs will narrow the gross margin of gas sales.
In addition, China Gas's net profit contribution rose 26 per cent year-on-year to HK $1.3 billion, thanks to strong growth in gas sales and connections.
Beijing pipe network contributes stable investment income
The national pipe network Beijing Pipeline Company's gas output rose 2 per cent year-on-year to 26.83 billion cubic meters, and its contribution to Beijing Holdings' net profit was unchanged at HK $954 million. Beijing Holdings retains its stake in Beijing pipe network because it is a multi-business state-owned enterprise representing Beijing. We expect the Beijing pipe network to operate steadily and contribute to the profits of stable associates for Beijing Holdings.
The dividend payout is expected to be stable and upward.
BEHL intends to pay a final dividend of HK40 cents per share (1H20: HK40 cents per share), corresponding to a dividend yield of 8 per cent (1H20 14 per cent). Assume that the total dividend payout ratio of Beijing Holdings in 2021 remains at the same level as in 2020, and the corresponding dividend yield is 7% (2020: 4%). We maintain our optimistic view of BEHL and expect its dividend to show a long-term upward trend. The company's current share price is equivalent to 0.36 times PB in 2021. Our target price has been lowered by 12% to HK $41.12, corresponding to 0.57 times the 2021 forecast PB, to reflect stable earnings growth and upward repair room for valuation savings brought about by diversified businesses.
Risk tips: 1) the growth of Beijing gas sales is lower than expected; 2) the profit contribution of China Gas and overseas projects is lower than expected.
