Core profit for 2023 is in line with our expectations

The company announced its 2023 results: revenue of HK$19.84 billion, -1.2% YoY; net profit to mother of HK$1.58 billion, +63.2% YoY; core profit (excluding net income from exit from Shanghai Gas and changes in fair value of convertible bonds) of HK$1.19 billion, +16.3% YoY. The company's core profit is in line with our expectations. Among them, 2H23's core profit was HK$740 million, +47% year over year. The company plans to distribute an annual dividend of HK$0.16 per share, which is +HK$0.01 per share compared to the previous year.

In 2023, the company's retail sales volume of natural gas was 16.46 billion square meters, with a price difference of 0.51 yuan/square, and +0.01 yuan/square; 910,000 new households were connected, -22% year-on-year. By the end of 2023, the company had 187 gas projects and 1.8 GW of distributed photovoltaics connected to the grid.

Development trends

The 2024 gross margin guidelines are conservative and may exceed expectations. Based on the current price situation of upstream resources and the affordability of industrial and commercial customers, management guides that the gross margin in 2024 will remain stable compared to 2023 (0.51 yuan/square meter). However, considering: 1) the total gas volume of China Gas Group in 2024 is expected to be further increased from about 3.5 billion square meters in 2023; 2) the market-based reform of residential gas consumption will accelerate, and the net price ratio may further increase; we judge that the company's gross margin in 2024 may still exceed management guidelines.

The renewable energy business is further shifting to an asset-light operating model. Taking into account project operation risks and the company's cash situation, the company has further slowed down the distributed photovoltaic installation target. Management has guided the cumulative PV grid connection volume of 2.8 GW by the end of 2024, and will further expand the revenue scale of asset-light operations such as EPC/operation and maintenance/carbon management. We believe this indicates that the scale of capital expenditure for the company's renewable energy business will be further reduced, and the strategic center has moved to emphasize the level of return and control of operational risks to maintain the long-term sustainability of business development. Taken together, we believe that the decline in the scale of renewable energy capital expenditure is expected to drive the company's free cash flow correction within the next 2-3 years, which also lays a good foundation for the company to further increase shareholder returns.

Profit forecasting and valuation

Considering that the connectivity business is still under downward pressure, we lowered our 2024 profit forecast by 12.2% to HK$1,451 billion, and introduced a profit forecast of HK$1.70 billion for the first time in 2025. The current stock price corresponds to the 2024/2025 price-earnings ratio of 6.8x/5.8x. Considering the positive catalyst brought to the company by the restoration of the gas retail business, maintaining an outperforming industry rating and a target price of HK$3.80, corresponding to 8.8x/7.5x P/E in 2024/2025, with 30.1% upside compared to the current stock price.

risks

Natural gas prices fluctuated greatly, and the smooth price progress fell short of expectations.