Operation development health
After researching Tianlun Gas recently, we believe that the company's operations are developing healthily: (1) the number of new urban gas users continues to grow; (2) gas sales are rising steadily; and (3) the gas pricing mechanism has been improved at an accelerated pace.
The number of new urban gas residential users added this year is expected by the company at the beginning of the year. We expect the number of new urban gas residential users to reach the company target of 280,000 to 300,000 in the full year of 2023, which is in line with the actual increase of 283,000 households in 2022, because the company's projects are mainly located in third- and fourth-tier cities, and are mostly supported by immediate demand.
The number of new urban fuel users added in the first half of this year actually increased 4.4% year on year to 138,000.
Gas sales are expected to increase 6-8% year-on-year during the year
We believe that retail gas sales increased steadily in the first three quarters of 2023, mainly due to a clear recovery in gas demand from residents and commercial users. The annual growth target of 6%-8% set by the company in the middle of the year can be reached at least. They are all superior to the 4.8% and 4.5% actual year-on-year increases in retail gas sales for the full year of 2022 and the first half of 2023, respectively.
Can the gas sales price difference reach the company's target in 2023
This year, local governments have raised retail gas prices for residential users one after another to improve the price adjustment mechanism. By the end of the first half of this year, in terms of gas sales, about 46% of residential users had completed the price adjustment process. Up to now, about 90% of residential users have completed the price adjustment process, slightly exceeding our expectations. We expect the gas sales price difference in 2023 to reach the company's target of 0.48-0.50 yuan (RMB, same below), which is higher than the price difference of 0.42 yuan in 2022. The gas price spread in the first half of this year actually rose 13.9% year on year to 0.41 yuan.
Reiterate the “buy” rating
Operating cash flow is expected to remain positive and grow this year, but we do not rule out the possibility that net cash flow will shrink due to falling financing cash flow. We maintain our profit forecast and target price of HK$6.12, corresponding to 7.0 times our target price-earnings ratio for 2024 and room for growth of 61.1%. Reiterate the “buy” rating.
Risk warning: (1) project delays, (2) tight gas supply, and (3) reduced or cancelled connection fees.