Key points of investment
Revenue fell slightly in 2015, and net profit declined significantly due to exchange gains and losses, but there was no impact on the company's operations. The company's total revenue in 2015 was HK$3,277 million, a decrease of 4% year-on-year, gross profit of HK$785 million, gross margin of about 24%, and a decrease in usage ratio of 0.9 percentage points. Shareholders' net profit was HK$93 million and earnings per share were HK3.7 cents, a sharp drop of 71.2% year over year, mainly due to exchange losses caused by the devaluation of the RMB.
The gas sales and filling station business declined, connection revenue increased, and the target for the full year of 2016 increased significantly. By the end of 2015, the company had 52 urban gas projects, with annual gas sales of 616 million cubic meters, a year-on-year decrease of 8.7%. The number of residential connections for the whole year was 160,794, an increase of 9.4% over the previous year. The company's target gas sales volume for the full year of 2016 was 800 million cubic meters, an increase of about 30% over the previous year. Of these, it is estimated that 65% of gas sales will come from industrial users, while 20%, or 160 million cubic meters of gas sales, will come from the contribution of newly acquired Sino Gas; the target number of connecting customers for the whole year was 180,000 households, an increase of about 12% over the previous year.
Expand the acquisition of Sino Gas to further develop synergies. The company will expand the acquisition of Sino Gas's shares to 88.7%, and the acquisition is expected to be completed in July 2017. Since the acquisition, the company has continued to build pipelines for the Sino Gas project. The tender has now been completed. It is expected that construction will be completed in the fourth quarter, after which cheaper pipeline gas can be used. The synergies between cost savings and acquisition integration will be reflected in the second half of 2016 and 2017.
Our opinion: Zhongyu Gas is a major urban gas project developer in China. Currently, it has a broad project layout in the central and eastern provinces of China. The company is currently in the resource integration period after completing the acquisition of Sino Gas. We believe that Sino Gas has strong synergy with the company's business, and it is expected that this synergistic benefit will gradually be reflected in 2016-2017. Industry-level gas consumption recovered strongly in the first quarter of 2016, and the company's gas sales in 2016 are expected to increase by around 30% over the same period last year. We believe that 2015 was the low point of the company's performance, and there will be a sharp increase in 2016 performance compared to the same period. Investors are advised to actively pay attention to the progress of pipeline construction connecting the company to Sino Gas and the increase in sales volume. In terms of valuation, the company's current stock price of HK$1.75 corresponds to a P/E of 24 times the EPS (about HK$0.073) after deducting exchange gains and losses in 2015. It is initially estimated in 2016 that the company's EPS could increase by about 30% year-on-year, and the corresponding dynamic P/E is about 18 times.
Risk warning: The progress of pipeline construction and expansion of acquisitions fell short of expectations, and the growth in natural gas consumption fell short of expectations.