1H23 core performance is lower than we expected.

The company announced 1H23 results: revenue of HK $9.88 billion, year-on-year-2.7%, and net profit of HK $1.12 billion, + 7.1% year-on-year, corresponding to HK $0.33 per share. Excluding the net income from Shanghai Gas and the fair value change of convertible bonds, the company's core profit was HK $450 million,-17.3% compared with the same period last year, and the company's 1H23 core profit was lower than we expected. The main reason is that 1H23 also reported that the number of connected households was-27.2% to 181000 compared with the same period last year, resulting in a decrease of HK $120 million in the distribution performance of the connecting business compared with the same period last year.

1H23 achieved a retail volume of 8.23 billion square meters of natural gas, + 9 percent year-on-year, and a price difference of 0.5 yuan per square meter, unchanged from the same period last year, with 430000 new users. The renewable energy business made a profit of 3 million Hong Kong dollars, reversing losses compared with the same period last year. As of the end of 1H23, the company has grid-connected distributed photovoltaic installed up to 1.12GW, the number of contracts up to 2.2GW.

Trend of development

The improvement trend of 2H23 natural gas retail business is expected to continue. The gas volume growth rate and gross margin of 1H23's natural gas retail business have improved. Looking forward to 2H23, we believe that it benefits from 1) the low base effect of 2H22, 2) the expansion of the company's independent gas source, and 3) the increase in the proportion of civil gas prices. The profit situation of the company's 2H23 natural gas retail business is expected to continue to improve, and is expected to achieve or even exceed the management's guidance of 9% gas growth and a gross margin of 0.51 yuan per square meter.

The business strategy of renewable energy has been adjusted. After taking into account the macroeconomic situation and the company's financial situation, the company's management adjusted the guidance on distributed photovoltaic grid connection at the end of 23 to 2.3GW from 3GW at the beginning of the year, which we believe indicates that the company's renewable energy business may shift from simply pursuing the scale of installed capacity in the past to emphasizing the level of return and controlling operational risks, so as to maintain the long-term sustainability of business development.

There is a great downward pressure on the connecting business. The downturn in China's real estate industry has had a great impact on the company's connecting business. 1H23's connecting business revenue is-24% year-on-year. Looking ahead, considering that the company has focused on the development of renewable energy business in recent years, and the slowdown in gas project mergers and acquisitions, we judge that the reduction of new mergers and acquisitions may cause more pressure on the company's connecting business in the next few years.

Profit forecast and valuation

The downturn in the real estate market has put pressure on the feeder business, and we have reduced our 24-year net profit by 15.2% to HK $1.82 billion / HK $1.65 billion. The current share price corresponds to 23 6.3x/7.0x 24-year price E. Maintain the outperform industry rating, but due to the earnings forecast downgrade, we lowered our target price by 15.6% to HK $3.80, corresponding to the 24-year 7.0x/7.7x P Bank E, which has 10.8% upside compared to the current share price.

Risk

Gross margin repair was lower than expected, and real estate fell faster than expected.