The net profit of Kunlun Energy grew 5% YoY to RMB3,222m in 1H23, 9% above our forecast. The strong growth at its natural gas sales segment more than offset the earnings declines at all other segments.We expect the company to show flat earnings in 2H23 on a HoH basis.We raise our 2023-25 earnings forecasts by 10% mainly to reflect the better-than-expected earnings of its LPG sales and natural gas sales segments. Reiterate BUY with target price increased to HK$9.29.
Key Factors for Rating
The better-than-expected 1H23 earnings mainly came from the higher-than- expected profit of its LPG sales and natural gas sales segments. The operating profit of its LPG sales segment (down 8% YoY to RMB423m) was 1.7x above our forecast on higher-than-expected price spread. That of its natural gas sales segment was 4% above our forecast on lower-than-expected operating costs.
The operating profit of its natural gas sales segment surged 25% YoY to RMB4.4bn in 1H23 as its retail gas sales volume grew 9% YoY, its dollar margin remained stable (RMB0.495/m3 in 1H23 vs RMB494/m3 in 1H22) and its residential new connections surged 22% YoY.
Looking ahead, we expect the company to see flat earnings in 2H23 on a HoH basis. Its retail gas should grow at slightly faster pace in 2H23 as the company guides for 10% YoY growth for full-year. The profitability of its LNG processing plants should improve as upstream gas supply increases. All these should be offset by lower output of its E&P segment as the contract of its PSC project in Liaohe Oilfield has expired in February 2023.
We increase our 2023-25 earnings forecasts by 10% mainly as we increase our earnings forecasts for its natural gas sales and LPG sales segments.
We reiterate our BUY call given its low valuations (7.1x 2023E P/E). It gas sales business posted the fastest earnings growth among its peers in 1H23 on strong volume growth. The negative impact from potential decline in new connections in future is also the lowest as we estimate it to account for only 7% of its earnings in 2023.
Key Risks for Rating
Further impairment for LNG processing business.
Low profitability of newly acquired city gas projects.
Valuation
We raise our DCF valuation from HK$9.19 to HK$10.32, mainly reflecting the increases in our earnings forecasts. Hence, we raise our target price from HK$8.27 to HK$9.29 as we still set our target price at a 10% discount to our DCF valuations. Our new target price is equal to 11.6x 2023E P/E.