The company's annual performance in 2021 exceeded market consensus expectations, but basically in line with our estimates. Revenue rose 17.6 per cent year-on-year to HK $80.44 billion, while net profit for shareholders rose 87.6 per cent to HK $9.92 billion.

We expect the company's natural gas sales to grow by about 5% in 2022. We believe that the company's natural gas sales will continue to benefit from the preferential policy environment and more coal-to-gas projects.

Due to higher gas prices, the company's gas sales spread is expected to fall slightly in 2022. We expect the gas sales spreads of gas distribution companies to continue to come under pressure and decline slightly in 2022.

We expect the water business to grow moderately in 2022 and the beer business to maintain normal growth.

Maintain the target price at HK $38.70 and maintain the "buy" rating.

The annual performance of Beijing Holdings ("the company") in 2021 exceeded market consensus expectations, but was basically in line with our estimates. Revenue rose 17.6 per cent year-on-year to HK $80.44 billion, while net profit for shareholders rose 87.6 per cent to HK $9.92 billion. The substantial increase in net profit is mainly due to the increase in gas sales and one-time income. The gas distribution business, beer business, water business and solid waste treatment business contributed operating profits of HK $7.01 billion, HK $400 million, HK $1.72 billion and HK $1.08 billion respectively, equivalent to 68.7%, 3.9%, 16.8% and 10.6% of the total operating profit. Total pipeline gas sales rose 5.0 per cent year-on-year to 18.9 billion cubic meters, while gas transmission increased 10.0 per cent to 54.27 billion cubic meters. Profits contributed by China Gas (00384 HK) fell 1.5 per cent to HK $2.1 billion. The beer business returned to its normal growth rate, contributing HK $400 million to profits. The water business also returned to normal, with profits contributed by the water business unchanged at HK $1.72 billion. The solid waste disposal business has completed 4.91 million tons of garbage disposal through its overseas subsidiaries and 5.75 million tons in China.

We expect the company's natural gas sales to grow by about 5% in 2022. Due to growing demand and new customers, especially coal-to-gas customers, the company's natural gas sales in Beijing increased by 2.2% in 2021 compared with the same period last year. Beijing's natural gas market is very mature and has a unique customer structure. The gas consumption of coal-fired power plants, residential users and heating centers accounts for about 95% of the company's total gas consumption, and its gas demand is generally stable. We believe that the company's natural gas sales will continue to benefit from a favourable policy environment and growing urban gas projects, which has not changed. In the long run, the demand for adjusting the structure of energy consumption will boost natural gas consumption. Both the central and local governments plan to cultivate natural gas as one of the main sources of energy in China's modern clean energy system, and this goal remains unchanged so far. On the other hand, environmental pressure will also boost natural gas consumption. All the favorable policies on natural gas consumption and the goals set by the government remain unchanged, and we expect that "coal to gas" and similar policies will continue to vigorously promote China's natural gas consumption. In 2021, China's natural gas consumption increased by 12.7% to 327.06 billion cubic meters. We believe that due to strong overseas demand, China's natural gas consumption will maintain rapid growth in 2022.

Although Beijing is a fully developed region, the company still benefits from greater consumer demand in the business sector and more "coal-to-gas" projects. Due to more coal-to-gas projects, we expect the company's total pipeline gas sales to remain stable and maintain moderate growth in 2022-2024. We expect the company's natural gas sales to grow by 5% in 2022. In 2021, the total gas output of Beijing Pipeline Company increased by 10.1% to 54.27 billion cubic meters, which is in line with our expectations. Beijing Pipeline Company operates Shaanxi-Beijing gas pipeline, connecting Shaanxi natural gas production areas to Beijing, Shandong, Hebei and other provinces. We expect gas deliveries to remain at current levels in 2022. The transportation pipeline has reached the design capacity and is expected to grow only slightly in the future.

Due to higher gas prices, the company's gas sales spread is expected to fall slightly in 2022. The price difference of the company's gas sales declined in 2021, mainly due to the rising cost of purchasing natural gas. The average gas purchase price rose sharply in 2021 due to strong demand and tight supply of liquefied natural gas. The spot price of liquefied natural gas accelerated in the second half of 2021 and continued until 2022. The outbreak of the conflict between Russia and Ukraine has further pushed up the price of liquefied natural gas. Generally speaking, companies are able to pass on most of the price increases to customers through the natural gas price adjustment mechanism. After the natural gas price reform, the natural gas price adjustment mechanism is more mature. However, because natural gas prices have risen so much in such a short period of time, downstream users will inevitably be seriously affected. The company has to share some of the price increases to support customers and ensure natural gas sales. In addition, the price difference of gas sales for residential users is more negatively affected by the rise in natural gas prices. Natural gas prices are expected to remain high in 2022, which will continue to have a negative impact on the company's gas sales spreads. In addition, due to record LNG prices, the company is unable to import LNG to replenish its natural gas supply. We expect the gas sales spreads of gas distribution companies to continue to come under pressure and decline slightly in 2022.

We expect the net profit of the water business to grow moderately in 2022, and the beer business is expected to maintain normal growth. Beijing Water Control Group's total revenue in 2021 rose 9.9 per cent year-on-year to HK $27.9 billion, while the company's net profit in its water business rose 0.3 per cent to HK $4.19 billion. The slowdown in net profit growth was mainly due to a decline in the construction services business. We expect the company's tap water treatment and water supply business to maintain double-digit growth in the next three years. The beer business will maintain normal growth in 2021, and the company's product structure is still improving. We expect the company to continue to improve the product structure of the beer business, and the profitability of the beer business is expected to improve in 2022. We expect a moderate increase in profits contributed by the beer business in 2022. It is expected that the company will steadily expand its domestic solid waste treatment capacity. It is expected that the operation of German waste energy utilization companies will tend to be stable, and the domestic solid waste business will grow steadily in 2022.

Maintain the target price at HK $38.70 and maintain the "buy" rating. Beijing Holdings is a comprehensive public utility company with beer business. The company focuses on public utility business, including gas distribution business and municipal water operation. The gas business accounts for the largest portion of the company's revenue and operating profits. We expect the company's total pipeline gas sales to maintain steady growth in the next three years, and the price difference between gas sales is expected to remain stable under the new pricing mechanism. We expect the company's natural gas sales to grow by 5% in 2022. Due to the accelerated growth of natural gas sales and connection revenue, the profits contributed by China Gas are also expected to resume rapid growth in 2022. We expect the profits contributed by the company's water business to grow moderately in 2022 as more water treatment and water supply capacity is put into production. We expect the product structure of the beer business to continue to improve in 2022, which will increase the profitability of the beer business. In addition, the company's solid waste disposal business is expected to grow steadily in 2022. The company's profitability is expected to remain stable in 2022. Due to the higher earnings per share forecast, we maintain the company's target price at HK $38.70, which is equivalent to a price-to-earnings ratio of 5.1 times fiscal year 2022, and maintain a "buy".