2023 core net profit +16% year over year; profit forecast was slightly lowered and the target price of Ganghua Smart Energy released results. In 2023, it recorded revenue of HK$19.8 billion, -1% year over year, and core net profit of HK$1.19 billion, +16% year over year, higher than Huatai's forecast (HK$1.15 billion). Natural gas sales were +8% year over year in 2023, and gross margin increased by RMB 0.01 per square meter year over year. The installed capacity of industrial and commercial distributed photovoltaics reached 1.8 GW by the end of 2023. Lowering gross margin and PV installed forecast, we lowered our 2024-25 core net profit forecast to HK$1,51/170 billion (previous value: HK$15.2/1.81 billion) and introduced a core net profit forecast of HK$1.79 billion for 2026. 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, taking into account the Hong Kong stock market discount). The core net profit was HK$1.32 billion and HK$190 million. Target market value of HK$12.9 billion, target price of HK$3.84 (previous value: HK$4.05, based on 8x/12x projected PE for urban gas/renewable energy business in 2024). The company plans to pay a dividend of HK$0.16 per share, with a current dividend rate of 5.5%. Maintain a “buy” rating.

The growth rate of natural gas sales is better than the industry average. The smooth price implementation helped the gross margin repair company's 2023 gas sales volume +7.9%, slightly higher than our previous forecast of 7.6%; of these, residents +1.7%, industry +6.1%, and commerce +8.5%; we expect the sales growth rate to be +8.0%/+7.2%/+7.1% in 2024-26, and the company is expected to maintain a growth rate higher than the industry average. In 2023, the gross margin of gas sales in Hong Kong and China increased by RMB 0.01 per square meter year on year to 0.51 yuan/square meter, gas purchase prices decreased by 0.11 yuan/square meter year on year, residential and commercial gas prices rose year on year, but industrial and distribution gas prices fell year on year. The company achieved about 75% of the consumer's net price in 2023. We expect that the net price will continue to advance in 2024. We expect the gross sales margin for 2024-26 to be RMB 0.51/0.53/0.53 per square meter.

The renewable energy business turned losses into profits, and the expansion of PV installations is expected to bring performance flexibility. In 2023, Hong Kong and China's industrial and commercial distributed photovoltaic grid-connected installations increased by 1.25 GW, with the cumulative grid-connected volume reaching 1.8 GW at the end of the year, leading the growth rate of the company's installed capacity; PV power generation reached 940 million kilowatt-hours, and the average sales price of electricity was 0.63 yuan/kilowatt-hour; the company's renewable energy business achieved net profit of HK$78 million in 2023, an increase of HK$197 million over the previous year. The company plans to introduce more external capital to support the addition of 1 GW of installed capacity each year. We expect the effective installed capacity of the company's PV to reach 2.1/3.1/4.1 GW in 2024-26 (grid-connected power generation and close to full production).

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