Renewable energy to create a second growth curve; maintain the "buy" rating, raise the target price we are optimistic that Hong Kong China Smart Energy (Hong Kong China) will become a domestic industrial and commercial distributed photovoltaic leading enterprise, by 2025 cumulative development / grid-connected installed capacity is expected to reach 15/8GW, market share of about 12%. We expect synergy between the company's renewable energy business and the city gas business, which will provide stable industrial and commercial customer resources and operating cash flow. We expect the 2022-2024 net return profit to be HK $1.76 billion / 2.27 billion / 2.93 billion (previous value: HK $1.74 billion / 2.21 billion / 2.83 billion). Based on the SOTP valuation, we give the company's renewable energy / city gas business 12x PE in 2022 (net profit of HK $150 million / 1.606 billion) and a target market capitalization of HK $23 billion in 2022, corresponding to the target price of HK $7.29m. Reiterate the "buy" rating.
It has great potential to become the leader of industrial and commercial distributed photovoltaic.
In September 2021, Hong Kong China Smart Energy formally put forward the strategy of "zero-carbon smart park". The company plans to lock up a total of 200 industrial park resources by 2025, planning a distributed photovoltaic installed scale of 15GW, of which 2022 and 2023 will lock a total of 120 industrial parks with a planned photovoltaic installed scale of 6/9GW. The company relies on three major advantages to develop distributed photovoltaic business: 1) establish a solid relationship of mutual trust with local governments; 2) have long-term service experience in industrial parks and customers; and 3) account for the highest proportion of industrial and commercial customers in the urban gas industry. We expect the return net profit of the renewable energy business to be HK $150 million / 600 million / 1.2 billion in 2022-2024 and is expected to surpass that of city gas in 2025.
City gas business focuses on the industrial and commercial market
Hong Kong And China Gas, the parent company, has been engaged in urban gas business for 160 years. Hong Kong and China has been developing in the mainland market since 1994. By the end of 2021, Hong Kong And China Gas had invested in a total of 303 city gas companies in 27 provinces and cities, including 176 owned by Hong Kong China, which has 15.09 million residents / industrial and commercial customers / 240000. Benefiting from the clean energy policy, we expect gas sales to grow by 12%, 11%, 11% and 11% in 2022-2024, leading the increase in industrial and commercial volume. Due to the rise in upstream gas prices, we expect the operating profit margin of gas sales to be 8.4%, 8.6% and 8.5% in 2022-2024. We estimate that the return net profit of the city gas business from 2022 to 2024 will be HK $1.61 billion / 1.67 billion / 1.73 billion.
The increase in the profit share of renewable energy is expected to bring about a revaluation.
Renewable energy builds the second growth pole, and city gas lays the operating cornerstone. We expect the 2022-2024 net profit to be HK $1.76 billion / 2.27 billion / 2.93 billion (CAGR is 22%) and EPS to be HK $0.56, 0.72 and 0.93. The proportion of net profit of renewable energy is expected to increase significantly, using SOTP estimation method: 1) to give renewable energy 25 times PE in 2022, equal to 25 times the average value of comparable companies, and the growth rate of net profit is not lower than that of comparable companies; give city gas 12 times PE in 2022, which is consistent with the average value of 5-year historical PE. We expect the company to have a market capitalization of HK $23 billion in 2022, corresponding to the target price of HK $7.29 (the previous value is HK $7.23, the valuation method and multiples remain unchanged).
Risk hint: the growth of gas sales in China is slowing, the demand of industrial users is weak, and the electricity prices of industrial and commercial users are falling.