Leading urban gas companies, gas sales business continues to grow
The company's predecessor, China Resources Petrochemical Group, officially transformed the urban gas sector in 2004. China Resources Gas Group was formally established in 2007 and listed on the main board of the Hong Kong Stock Exchange in November 2008. In 2004-2021, the company's operating revenue/net profit CAGR was 20.2%/19.3%, respectively. By business, the gas sales business is the basic market. In 2023, H1 revenue reached HK$41,237 billion, accounting for 85.3% of revenue.
Industry demand is gradually being repaired, and development potential is being rekindled
Total demand: There is still plenty of room for improvement in China's natural gas consumption. Domestic natural gas consumption showed a restorative increase in 2023. The annual domestic gas consumption was 394.53 billion cubic meters, an increase of 7.6% over the previous year. However, there is still plenty of room for improvement in domestic natural gas consumption. Domestic natural gas accounted for 8.9% of total energy consumption in 2021, and global natural gas consumption accounted for 24% of total primary energy consumption in the same year. In 2022, the company's retail gas sales ranked first among the five major urban fuels, and the proportion of gas sales in the country's total consumption was 0.6 pct higher than in 2021.
Under the positive trend of the natural gas market in the future, the company is expected to continue to benefit.
Demand structure: Industry and commerce are being boosted, and structural optimization creates opportunities. In 2017-2022, the compound growth rate of China's industrial fuel consumption reached 15.04%, accounting for 42%, making it the largest consumer of natural gas. The company accounts for a high proportion of industrial and commercial users, and gas consumption is growing rapidly. By the end of 2022, industrial users accounted for 52% of gas sales, and industrial users sold 18.76 billion cubic meters of gas per year, an increase of 3% over the previous year. As of June 2023, first-tier city users accounted for 45.2% of the company's urban users and 13.5% of second-tier city users, totaling 58.7%. Since demand in Tier 1 and 2 cities is more elastic, industry and commerce are recovering faster, and the user structure concentrated in developed cities is conducive to the recovery of the sales side. In addition, the company continues to acquire new urban combustion projects. In 2022, 3 new projects were signed and 18 new registered projects were added at the group and member company levels. The potential gas sales volume was 6.14 billion square meters, and it is expected to add 4.726 million new residential users.
Upstream costs are declining and margins are gradually progressing, and the company's gross margin repair situation is relatively favorable: In June 2023, the National Development and Reform Commission issued the “Guiding Opinions on Establishing and Improving the Upstream and Downstream Price Linkage Mechanism for Natural Gas” (Development and Reform Price (2023) No. 682). Under its guidance, various provinces and cities have initiated or accelerated price linkage reforms. As of January 5, 2024, 98 municipal and county administrative units involved in price linkage mechanism documents or price adjustment notices have been issued. In regions where the price adjustment range has been determined, the average increase in basic residential gas prices is 0.25 yuan/cubic meter, and the average increase is 9.94%.
Downstream costs: Domestic procurement prices began to gradually stabilize in 2023. The company's comprehensive procurement cost in the first half of 2023 was 3.08 yuan/square meter, a decrease of 0.02 yuan/square meter compared to 3.10 yuan/square meter in the first half of 2022. Overseas supply and demand are gradually easing, supporting the decline in international gas prices. On the supply side, according to the IEA, as of October 2023, projects that have begun construction or made final investment decisions may increase the liquefaction capacity by 250 billion cubic meters per year by 2030; on the demand side, according to the IEA's latest forecast, the adjustment for natural gas demand in 2040 will be reduced by 140 billion cubic meters, and developed economies, led by Europe, account for about three-quarters of the total decline in gas demand. Starting in 2025, the global gas market is expected to enter a new phase of loose supply and demand, and natural gas prices are expected to be low. The company's Rudong receiving station is expected to be completed in 2026, coinciding with the large-scale commissioning of the project. Haiqi has entered a period of low prices. The company can make full use of overseas resources, optimize its own gas source structure, and reduce procurement costs.
Upstream costs are declining and net prices are gradually progressing, and the company's gross margin repair situation is relatively good. The company's H1 gross margin in 2023 was 0.5 yuan/square meter, an increase of 0.05 yuan/square meter over the same period in 2022. With the further improvement and unblocking of the national smooth price mechanism, combined with the reduction of travel procurement costs, we expect the company's gross margin to be further repaired.
Profit Forecasts and Investment Ratings
The gas industry is expected to usher in volume and price restoration, and we believe that the location advantage of the company's urban combustion projects is expected to gain greater flexibility. We expect the company to achieve net profit of HK$55.5, 64.1, and 7.13 billion HK$7.13 billion in 2023-2025, +17.3%, +15.4%, and +11.2%, respectively, and corresponding PE of 10.6, 9.1, and 8.2 times. We gave the company a target PE multiplier of 10 times in 2025 and a target share price of HK$30.8 per share, covering it for the first time and giving it a “buy” rating.
Risk warning: Risks such as upstream prices rising above expectations, insufficient policy support, falling short of expectations on the favorable price policy, falling short of expectations, the pace of industry integration falling short of expectations, the expansion of the company's industrial and commercial users falling short of expectations, and a certain degree of subjectivity in performance measurement