Optimistic about 2023Universe profit growth in 2024; raise target price
We are bullish on the profit growth of Tianlun Gas 2023 Compact in 2024, mainly due to the recovery of natural gas demand and lower costs. We adjust the core profit forecast of 2022Compact 2023 to RMB 579 million / 757 million / 894 million (the previous value: RMB 622 million / 783 million / 901 million), and the corresponding core EPS is RMB 0.57max 0.75max 0.88. Major adjustments: 1) we reduced the retail volume growth forecast for 2022 Universe by 6.6 percentage points in 2024, and raised the forecast for 2023 by 6.1 percentage points; 2) we lowered the gross margin forecast for 2022 sales by 0.3%, and increased the 2023 Universe forecast for 2024 by 8.2%, 14.6%, and 3) We lowered the photovoltaic EPC capacity forecast by 33%, 40%, 33% for 2024. We raised the target price to HK $6.10, based on 7 times 2023 forecast PE (previous value: HK $4.93, based on 7 times 2022 PE), which is 5.7 times higher than Tianlun's 5-year historical PE average. Maintain "buy".
The gross gap between retail volume and sales may rebound in 2023
Considering the impact of the epidemic, we have lowered our retail volume growth forecast by 6.6 percentage points in 2022. We expect industrial and commercial natural gas demand to recover after the optimization of epidemic prevention measures. Retail gas volume in 2023 and 2024 will increase by 18% and 11% compared with the same period last year. The gross margin of Tianlun gas sales fell 29% year-on-year in 1H22, but improved in 2H22. We estimate that the gross margin of sales in 2022 and 2023 will be RMB 0.43 per cubic meter, mainly due to more stable price transmission and falling import prices of liquefied natural gas.
Household photovoltaic business is expected to add new power in 2023 and 2024.
Due to the relative saturation of the market, the number of new residential users of 1H22 fell 33 per cent year-on-year, and revenue from access business fell 37 per cent year-on-year. Tianlun Gas basically achieves the goal of converting 2 million rural coal to gas by 2022, and plans to expand the layout of township energy business, which is mainly related to household photovoltaic development. Considering the impact of the epidemic on capacity construction, we downgrade the photovoltaic EPC completion forecast in 2022. However, the household photovoltaic business is still expected to add new momentum in 2023 and 2024.
Historical performance has been digested by the market, and valuations are still attractive
Our new target price of HK $6.10 is based on 7 times the 2023 forecast PE, which is nearly 1 standard deviation higher than the average of Tianlun's 5-year historical PE, as we are optimistic about the rebound potential of Tianlun's gas margin and household photovoltaic adds new impetus to its performance. Tianlun's current share price corresponds to 6 times the 2023 forecast PE, and considering that its 1H22 performance has been digested by the market, we think the valuation is still attractive.
Risk hint: the growth rate of gas sales is lower than expected, the gross margin of gas sales is lower than expected, and the progress of household photovoltaic is not as expected.