The prospect of gas sales in China is stable, while Hong Kong shows signs of recovery.

The previous drag on the new energy business is being reversed.

Reasonable valuation, first covering neutral rating, discounted cash flow method target price of HK $12.2 China: future sales growth trend is stable

Thanks to the pull of industrial users (year-on-year + 16%), the growth of gas sales in FY21 began to accelerate after the slowdown in 2020 (first quarter of 21: year-on-year + 30%), and the sales growth rate is expected to reach 14%. The company's strong demand growth in the eastern coastal areas and active layout in the Northeast, southern heating and distributed energy will ensure the company's future sales growth (+ 12% forecast for fiscal year 22). By participating in various liquefied natural gas receiving terminals and Jiangsu Jintan underground gas storage, it will be conducive to its future natural gas supply and achieve a stable natural gas procurement cost. We expect the company's natural gas sales in China to grow at a compound annual EBITDA rate of 10 per cent in the 21-23 fiscal year.

Hong Kong: cash cow business has good profitability and resilience

We expect the company's sales in Hong Kong to increase with the recovery of business activity (overall in the first quarter of 21:

Year-on-year-1.8%, business users: + 3% year-on-year in March, compared with-30% year-on-year in January and February) forecast to turn to positive growth in fiscal year 21, while housing demand remains stable. The company's high operating efficiency and fuel adjustment fees will ensure high profit margins (that is, the projected EBITDA profit margin for fiscal year 21 is 50.1%, compared with 22.3% for China's gas sales business).

New energy: in line with the long-term trend of environmental protection

The renewable theme is a long-term structural trend, and Hong Kong And China Gas produces downstream chemicals and fuels through his biomaterial production plant. The division achieved a strong recovery in fiscal year 20 (EBITDA + 29% year-on-year) as its hydrogenated vegetable oil plant in Jiangsu began operating in the third quarter of 20. The rebound in crude oil prices and the commissioning of more new projects will boost the growth of its new energy business, with EBITDA projected to grow at a compound annual rate of + 19 per cent in fiscal year 21-23, accounting for 9 per cent of EBITDA in fiscal year 21.

For the first time, Hong Kong And China Gas was given a neutral rating, with a target price of HK $12.2. we believe that the strong growth momentum that began in the second half of 20 years will continue into the first half of 21, and it is predicted that Hong Kong And China Gas's gas sales will increase by 23% in the first half of 2001 compared with the same period last year, driving revenue growth of 24%. For the first time, we covered Hong Kong And China Gas with a neutral rating, with a discounted cash flow target price of HK $12.20, corresponding to a forecast price-to-earnings ratio of 29.0 times / 26.9 times for fiscal year 21. Earnings per share for fiscal year 21-23 is forecast to grow at a compound annual growth rate of 8%.

We believe Hong Kong And China Gas's downside is supported by a dividend yield of 3 per cent.