1H22 home net profit rose 34 per cent year-on-year; sales gross margin rebounded compared with 2H21. Hong Kong China Smart Energy (Hong Kong China) released 1H22 semi-annual report, home net profit rose 34 per cent year-on-year to HK $1.04 billion, down 28 per cent to HK $588 million after excluding changes in the value of convertible bonds, accounting for 33 per cent of Huatai's annual core profit forecast of HK $1.76 billion. Taking into account the slowdown in the growth of gas sales and the delay in the progress of renewable energy projects, we have lowered our 2024 core profit forecast for 2022 Universe to HK $1.49 billion / 1.89 billion / 2.4 billion (previous value: HK $1.76 billion / 2.27 billion / 2.93 billion). We give Hong Kong China City Gas Business 12 times the 2022 forecast PE (core profit of HK $1.49 billion), which is the same as the average of Hong Kong China's 5-year historical PE; temporarily do not give renewable energy 22-year forecast PE (core profit loss of HK $9.7 million); 2022 target market capitalization of HK $18 billion, corresponding to the target price of HK $5.53 (previous value: HK $7.29,based on 12x25 times city gas / renewable energy segment PE). Maintain a "buy" rating.
The growth rate of gas sales has slowed down, and the gross margin of gas sales has rebounded compared with 2H21.
1H22 sales in Hong Kong and China increased by 4 per cent year-on-year to 7.54 billion cubic meters. Due to the impact of the epidemic, the growth of gas demand slowed significantly. Given that 2H22 demand is likely to pick up, we expect the company's gas sales to grow by 10% (previous value: 12%) in 2022, of which industrial / commercial / residential sales will grow by 11%, 7%, 7%, 7%, 7%, 7%, 7%, 7%, 7%, 7%, 7% and 7%, respectively. The 1H22 of Hong Kong and China sales narrowed to 0.50 yuan per square meter compared with the same period last year, but rebounded by 0.02 yuan per square meter compared with 2H21. With the recovery of industrial gas consumption and the expansion of the proportion of household price adjustment, the gross margin of expected 2H22 continues to rise, and we predict that the gross margin for the whole year will return to 0.51 yuan / square meter.
The progress of renewable energy projects has been delayed, but the target of installed scale remains the same. At the end of 1H22, Hong Kong and China signed a contract for distributed photovoltaic capacity to reach 0.78GW, of which grid-connected and under construction capacity reached 0.38GW. Due to the control of the epidemic, the construction of the project has been delayed. Ganghua plans to lock 80 zero-carbon industrial parks in 22 years, among which the contracted capacity / grid-connected capacity of distributed photovoltaic projects and capacity under construction reach 1.8/1.0GW. Therefore, we predict that the profit contribution of the renewable energy business may be postponed together, with a loss of HK $9.7 million in 22 years (high initial input cost) and a profit of HK $283 million / 739 million in 23-24, contributing to a significant profit increase since 23 years.
Lower profit forecast to target price of HK $5.53
We forecast a core net profit of HK $1.49 billion / 1.89 billion / 2.4 billion and EPS of HK $0.47, 0.60 and HK $0.76 in 2024, corresponding to a CAGR of 14% of core EPS forecast for 2022-2024. Renewable energy comparable companies 26 times PE average, but due to 22 years of losses in Hong Kong and China's renewable energy business, do not give forecast PE; to Hong Kong and China's urban gas business 12 times PE (the same as Hong Kong China's 5-year historical PE average). We expect HKH to have a market capitalization of HK $18 billion in 2022, corresponding to the target price of HK $5.53 (previous value: HK $7.29, based on 25 times PE of renewable energy business and 12 times PE of city gas business).
Risk hint: the growth rate of gas demand slows down; the electricity price of industrial and commercial customers falls
