Keep the dividend yield steady and maintain the "buy"; lower the target price
The revenue / core profit of Tianlun Gas 1H21 is 3.6 billion yuan / 449 million yuan (up 20% over the same period last year). 1H21 core operating data: 1) retail volume increased by 30% year-on-year; 2) the number of newly connected residential users was 290000; 3) the sales margin narrowed to 0.51 yuan per cubic meter; and 4) the equity incentive plan was approved. Tianlun declared an interim dividend of 0.134 yuan per share, with a dividend yield of 30 per cent.
Taking into account the narrowing of natural gas profit margins, we reduced our core profit by 4% in 2021-2023 by 2% to 990 million / 1.15 billion / 1.31 billion yuan, corresponding to an EPS of 0.98 pesos 1.15 pounds 1.31 yuan, with an annual compound growth rate of 14%. We lowered the target price to HK $9.46, based on 8 times the expected 2021 PE, which is higher than Tianlun's historical PE average of the past 3 years (7 times). Maintain "buy".
1H21 retail volume increases 30% compared with the same period last year
1H21 City Gas sales business revenue increased 28% year-on-year, operating profit margin of 10.6% (1H20:
11.7%). Tianlun's urban gas sales (excluding trade volume) rose 30 per cent year-on-year to 742 million cubic meters. Specifically, urban gas sales of residents / industrial and commercial / vehicle users increased by 18%, 36% and 29% respectively compared with the same period last year. The gross margin of 1H21 sales fell to 0.51 yuan / cubic meter (1H20:0.56 yuan / cubic meter), mainly due to the sharp rise in LNG prices over the same period last year and the lag of pipeline gas price transmission. We expect Tianlun city gas sales to grow by 25% in 2021 compared with the same period last year, but the gross sales margin is narrowed.
Conversion from coal to gas promotes the growth of connection business revenue
1H21 Tianlun added 290000 residential users (1H20:38 10,000), including 140000 coal-to-gas users (1H20:24 10,000). During the 1H21 period, the company focused on the construction of supporting facilities outside the village, so we expect the scale of 2H21's coal-to-gas users to grow month-on-month. Revenue from 1H21's feeder business grew 3 per cent year-on-year, while operating margins fell to 41.8 per cent (1H20 44.3 per cent). The cumulative cash income ratio of 1H21's coal-to-gas business is still 62%.
The valuation is attractive and sales are expected to grow steadily in the future.
Our new target price of HK $9.46 is based on 8 times the expected 2021 PE (previous value: HK $10.96), which is higher than Tianlun's historical PE average of the past 3 years (7 times), reflecting the company's business outlook is expected to improve.
The company's current share price corresponds to 7 times the expected 2021 PE, and we find its valuation attractive given the company's robust operating performance. Tianlun also announced an interim dividend of 0.134 yuan per share, corresponding to a dividend yield of 30 per cent. Assuming the same dividend payout rate for the whole year, the expected dividend yield for 2021 is 4.4%.
Risk hints: 1) the growth of gas sales is lower than expected; 2) the profit margin will decline in 2021.