1H22 core net profit fell 46%, cut profit forecast and target price Tianlun Gas (Tianlun) announced on August 29 1H22 results: revenue / core profit of RMB 3.75 billion / 241 million (year-on-year + 4%), core profit is equivalent to our full-year forecast of 24%. In the first half of the year: 1) the retail volume increased by 10% compared with the same period last year; 2) the number of newly connected residential users was 190000, and 3) the gross margin of sales narrowed to 0.36 yuan per cubic meter. Taking into account the slowdown in retail volume growth, the narrowing of sales margin and the increase in household photovoltaic performance, we reduce our core profit forecast for 2022 Universe 2023 to RMB 783 million for 2024 (previous value: RMB 1.01 billion for 10.1 shock), and the core EPS is RMB 0.62 for 0.78 ex. We lowered the target price to HK $4.93, based on 7 times 2022 PE (previous value: HK $8.67, based on 7 times 2022 PE), which is 0.5 times higher than the average of Tianlun's 5-year historical PE, because we are optimistic about the recovery potential of Tianlun sales gas margin and household photovoltaic adds new impetus to its performance. Maintain "buy".
1H22 retail gas volume increased by 10 per cent year-on-year, gross sales margin narrowed significantly according to the results announcement, Tianlun 1H22 city gas sales revenue increased 26 per cent year-on-year, operating profit margin of 4.2 per cent (1H21 10.5 per cent). Tianlun's urban gas retail gas volume increased by 10% year-on-year to 835 million cubic meters, of which residential / industrial and commercial retail gas volume increased by 18% and 8% respectively, while vehicle user retail gas volume decreased by 12%. The gross margin of 1H22 sales narrowed to 0.36 yuan per cubic meter (1H21:
0.51 yuan / cubic meter), mainly due to the upstream gas price soaring and pipeline gas price transmission lag. We have lowered the retail volume growth forecast for 2022 to 8% (previous value: 25%) and the gross margin of sales to 0.43 yuan / cubic meter (previous value: 0.48 yuan / cubic meter).
The goal of changing coal to gas has been basically completed, and household photovoltaic business has set sail.
According to the announcement, 1H22 Tianlun newly connected residential users are 190000 (1H22:28.5 million), of which 58000 are coal-to-gas (1H22:14). Revenue from 1H22's connectivity business fell 37 per cent year-on-year, while operating margins were flat (41 per cent). The business goal of changing coal to gas has been basically completed, and the company will expand the layout of township energy business, mainly related to household roof photovoltaic development. We expect Tianlun to complete the development of 300MW's household photovoltaic EPC in 2022 and achieve rapid growth in 2023 and 2024.
Poor performance has been digested by the market, and the valuation is attractive
Our new target price of HK $4.93 is based on 7 times 2022 forecast PE (previous value: HK $8.67, based on 7 times 2022 forecast PE), which is 0.5 times higher than Tianlun's 5-year historical PE average, as we are optimistic about the rebound potential of Tianlun sales gas margin and household photovoltaic adds new impetus to its performance.
Tianlun's current share price is equivalent to 5.0x 2022 PE. Considering that its 1H22 performance has been gradually digested by the market, we think the valuation is not high. Tianlun plans to pay an interim dividend of 7.35 cents per share, with a corresponding dividend rate of 31%.
Risk hint: the growth rate of gas sales is lower than we expected, the gross margin of gas sales is lower than expected, and the progress of household photovoltaic is not as expected.