The company's recent situation
We recently organized a non-transactional roadshow for Ganghua Smart Energy's core management. The management analyzed the reasons for the decline in performance in 2022 and shared their views on business development plans.
Management stated that core profit in 2022 (excluding Shanghai Gas's loss and fair value change profit and loss on convertible bonds) fell 37% year on year to HK$1.02 billion, 1) City Fuel business operating profit was -17% year-on-year to HK$1.83 billion due to changes in the RMB exchange rate/decline in gross margins and increase in operating expenses; 2) The scale of losses in the renewable energy business increased 112% year-on-year to -119 million HK$119 million; 3) Headquarters expenses increased 32% year-on-year to HK$0.58 billion HKD; 4) Due to mergers and acquisitions of Shanghai The scale of loans increased due to gas equity and other reasons, and financial expenses increased 24% year over year to -633 million Hong Kong dollars.
reviews
There has been an improvement in the gas volume growth rate in February. Management said that the monthly gas volume growth rate in February has already exceeded 10%, which is a clear improvement compared to the 5% growth rate for the whole year of '21. We believe that if the recovery trend in February continues, the growth rate of gas volume for the full year of '23 is expected to reach management's guide of +12%.
The number of connected households was stable in '23, and profit margins are expected to pick up. Since the connection business has a strong correlation with the real estate cycle, affected by the downturn in the real estate industry in '22, the market is concerned about the company's connection business revenue and profit growth. However, considering that the construction cycle of real estate projects takes 2-3 years, the connection projects settled in 23 are still mainly projects from 20-21. Based on this, we estimate that the number of new user connections of the company is still expected to stabilize at 90-1 million households in 23 years. In terms of profit margins, we estimate that part of the ancillary fee revenue that has not been settled in '22 is expected to be recorded in '23, driving up profit margins in the connection business.
Expectations of poor profitability of Shanghai Gas and lower returns on renewable energy may already be included in the stock price. The company's stock price has been revised by more than 50% from its 22-year high. We believe that the current stock price already reflects expectations that Shanghai Gas's poor profitability and potential electricity price policy adjustments will lead to a decline in the return rate of renewable energy projects. Looking ahead, we think the company's performance may return to the growth channel as 1) Shanghai Gas equity withdraws from the transaction and completes delivery, and 2) the installed capacity of distributed photovoltaics is further increased.
Profit forecasting and valuation
The profit forecast for 23/24 remains unchanged. The current stock price corresponds to 23/24 7.2x/5.4x P/E. Maintaining an outperforming industry rating and target price of HK$4.5, corresponding to 9.5x/7.1xP/E in 23/24, there is room for 32.4% upward from the current stock price.
risks
The connection business has declined sharply, and upstream gas prices have fluctuated greatly.