1H23 core net profit is-14% year-on-year; lower profit forecast and target price Hong Kong China Smart Energy (Hong Kong China) announced results on August 14, 1H23 recorded revenue of HK $9.88 billion, year-on-year-3%, core net profit (excluding fair value changes and Shanghai gas impact) HK $449 million, year-on-year-14%. The sales volume of 1H23 natural gas is + 9% year on year, and the gross margin of gas sales is unchanged at 0.50 yuan per square meter. At the end of June, the industrial and commercial distributed photovoltaic installation reached 1.12GW. Taking into account the change in core driving assumptions, we have reduced our core net profit forecast for 2023-2025 to HK $1.22 billion 1.67 billion (previous value: HK $14.6 billion 21.3 billion). According to the segment valuation method, the company is given 9 times PE of urban gas business in 2023 (higher than the 5-year historical PE average of 8.3 times, profitability repair) and 25 times PE of renewable energy business (21 times of comparable company average, segment profit growth is higher than that of peers), and the core net profit is HK $1.11 billion and HK $100 million. The target market capitalization is HK $12.6 billion and the target price is HK $3.75 (previous value: HK $5.20, based on the city gas / renewable energy business 9 times / 25 times the 2023 forecast target PE).

In view of the fact that the rapid growth in renewable energy profits in 24-25 years is expected to bring a revaluation, maintain the "buy".

1H23's natural gas sales are + 9% year on year, and the gross margin is flat.

1H23 Hong Kong China gas sales revenue was unchanged at HK $8.63 billion, while gas sales volume was + 9% year-on-year to 8.23 billion square meters.

Taking into account the weak recovery in natural gas demand, we downgrade our forecast for 2023 gas sales growth to 9% (previous 12%); industrial / commercial / residential / distribution and other gas growth rates are 7%, 7%, 5%, 20%, respectively.

The gross margin of 1H23 sales in Hong Kong and China was unchanged at RMB0.50 per square meter, gas purchase prices were unchanged, residential and commercial gas prices rose year on year, but industrial and distribution gas prices fell year on year. Taking into account the continued progress of the parallel price mechanism, we expect the gross margin of sales to rise by 1 cent per square meter to 0.51 yuan per square meter in 2023 (the previous value will rise by 2 cents per square meter).

Planning and adjustment of industrial and commercial distributed photovoltaic installation

1H23 Hong Kong and China's industrial and commercial distributed photovoltaic grid-connected installation increased 0.74GW compared with the same period last year, of which the cumulative grid-connected volume reached 1.12GW at the end of June, and the company's installed scale is ahead of its peers. We expect the company's effective photovoltaic capacity to reach 1.06GW in 2023 (grid-connected and close to full production), which will benefit from the accelerated construction progress and the decline in the price of photovoltaic modules. The company adjusts the installation planning of renewable energy, mainly taking into account the changes in the industry environment and the state of economic recovery. We reduce the core net profit of the sector to HK $504 million in 2025 (previous value: HK $2.35 billion, HK $1.494 billion).

Risk hint: the growth rate of gas demand slows down; the electricity price of industrial and commercial customers falls.