Valuation changes, and the share of renewable energy business value increased

The recovery in natural gas sales was slower than expected, and the forecast for the growth rate of gas sales was adjusted; PV investment plans may change, and the effective installed capacity forecast was lowered. Taking into account these changes in core driving assumptions, we lowered our 2023-2025 core net profit forecast to HK$11.5/15.2/1.81 billion (previous value: HK$12.2/16.7/HK$2.12 billion). According to the Segment Valuation Act, the company was given 8xPE for the 2024 urban gas business (equal to the 5-year historical PE average) and 12xPE for the renewable energy business (16x lower than the average value of comparable companies, considering the Hong Kong stock market discount). The core net profit was HK$1.17 billion and HK$350 million, and the share of renewable energy business profit to value increased year-on-year. The target market value is HK$13.6 billion, and the target price is HK$4.05 (previous value: HK$3.75, based on 9x/25x projected PE for the city gas/renewable energy business in 2023). Maintain a “buy” rating.

Recovery is slowing down, and forecasts for natural gas sales growth are adjusted

The company's 1H23 gas sales volume was +9% year on year; since July, the company's retail gas growth has slowed. Among them, industrial and commercial gas volume has maintained medium to low unit growth, and residential gas volume has remained basically flat year on year. We lowered the 2023 sales growth rate to 7.6% (previous value 8.9%), and the sales growth rate is expected to be 7.7%/7.2% in 2024-25.

In 1H23, the gross margin of gas sales in Hong Kong and China remained flat at RMB 0.50 per square year on year. Gas purchase prices remained flat year on year. Residential and commercial gas prices rose year on year, but industrial and distribution gas prices fell year on year. Considering the continued progress of the smooth price mechanism, we expect the gross sales margin to rebound to RMB 1 cent/square meter to 0.51 yuan/square meter in 2023.

Plan adjustments, lower industrial and commercial PV installed capacity forecasts

1H23 Hong Kong and China's industrial and commercial distributed photovoltaic grid-connected installations increased by 0.74 GW over the same period last year. Of these, the cumulative grid-connected volume reached 1.12 GW at the end of June, leading the company's installed capacity growth rate ahead of its peers. We expect the effective installed capacity of the company's PV to reach 1.06 GW in 2023 (grid-connected power generation and close to full production), benefiting from the acceleration of construction progress and falling PV module prices. However, the company adjusted its renewable energy installation plan, mainly taking into account changes in the industry environment and the state of economic recovery. We lowered the effective PV installed capacity to 2.5/3.7 GW in 2024-25.

Risk warning: the growth rate of gas demand is slowing; electricity prices for industrial and commercial customers are falling.