1H23 Core profit fell 8% year over year, lowering profit forecasts and target prices
Tianlun Gas 1H23 achieved revenue of RMB 4 billion (+6% year on year), net profit of RMB 186 million (+9% year on year), and core profit of RMB 223 million (-8% year on year); the decline in core profit was mainly a decrease in engineering installation and service business volume. First half of the year: 1) retail sales volume increased by 4.5% year on year, 2) the number of newly connected residential users was 138,000, and 3) gross sales margin increased to RMB 0.41 per square meter.
Gas demand recovered weakly, lowering the 23-24 retail gas growth rate forecast; the impact of the real estate cycle lowered the 23-24 new connection forecast; we lowered our 23-24 core profit to RMB 571/644 million yuan (previous value of 777/894 million yuan) and introduced a 25-year forecast of 730 million yuan, corresponding to 0.58/0.66/0.74 billion yuan in core EPS for 23-25. We lowered our target price to HK$4.46, which is based on 7 times the predicted PE for 2023 (previous value: HK$6.10, based on 7x 2022E PE), which is higher than the average PE value of 5.4x in Tianlun's 5-year history. The company announced an interim dividend of RMB 6.82 cents/share. We expect the core profit payout rate to remain at 30% for the full year of '23, maintaining “buying”.
Retail sales volume increased slightly year-on-year, and the gap in sales was gradually corrected
According to the performance announcement, Tianlun 1H23's retail sales revenue was +6.7% year-on-year, and the operating profit margin was 6.4% (1H22:4.2%). The retail volume of Tianlun 1H23 increased 4.5% year on year to 872 million square meters, of which retail gas volume for residents/industrial/commercial/transportation was +7.9%/+2.3%/+13.4%, respectively. The 1H23 gross sales gap was fixed at 0.05 yuan/square meter to RMB 0.41 per cubic meter, thanks to favorable industrial and commercial prices and high gross margins, and an increase in traffic gas volume. The growth rate of retail gas volume in the first half of the year was low, and gas demand was still in a weak recovery stage. We lowered the retail gas growth forecast for 23-24 to 7%/8% (previous value: 18%/11%), and adjusted the gross sales margin to RMB 0.48/0.49 yuan/square (previous value: 0.47/0.50 yuan/square meter).
The number of new connections increased and decreased compared to the previous year, and value-added services grew rapidly
According to the performance announcement, Tianlun 1H23 added 138,000 new residential users (+4.4% YoY), and 1,467 new industrial and commercial users (-6.5% YoY). 1H23's engineering installation and service business revenue fell 23% year over year, while operating profit margin remained the same (41%) year on year. Considering the impact of the real estate cycle, we lowered the forecast for the number of new connections in 23-24 to 280/260,000 (previous value: 300,000 households). 1H23's value-added service revenue was +11%, gross profit was +25%, and gross margin was +5.3 pp year on year, thanks to reduced costs and increased revenue and expanded business channels. The company is gradually forming its own brand service system, and value-added services are expected to partially offset the impact of declining connectivity.
Risk warning: The growth rate of gas sales was lower than expected, the gross sales gap fell more than expected, and household photovoltaics did not progress as much as expected.