In recent years, due to the disturbance of various factors such as geopolitics, the global energy market has fallen into a difficult situation where the imbalance between supply and demand has intensified and prices fluctuate frequently, which has also increased the uncertainty of the market situation. But the pace of the global green energy transition has not stopped, and has even accelerated.

Europe and the US have successively introduced special support programs to encourage the reduction of coal consumption and support the development of green industries. The Chinese market, while promoting its own energy transformation, also strongly supports green and low-carbon energy development. This year, China's government work report once again proposed actively and steadily promoting carbon neutrality at the peak of carbon, while further advancing the energy revolution, controlling fossil energy consumption, and speeding up the construction of a new energy system. It can be seen that actively developing clean energy and promoting a green and low-carbon transformation of the economy and society has become the general consensus of the international community in dealing with global climate change.

The Zhitong Finance App notes that in the current challenging environment, there are still some high-quality energy companies that have maintained strong fundamental resilience. Take Ganghua Smart Energy (01083), which has just disclosed results. For the whole of 2023, the company achieved revenue of HK$19.842 billion and net profit to mother of about HK$1,575 billion, a significant increase of 63.21% over the previous year. By business, the gas business performed steadily during the reporting period, achieving a net profit of HK$1,841 million during the reporting period. At the same time, the renewable energy business, as the company's second growth curve, showed a strong growth trend.

It can be seen that in a challenging market environment, relying on the strategic advantages of “urban combustion business+renewable energy business” two-wheel drive, the overall business indicators of Ganghua Smart Energy have shown a steady and positive trend.

The foundation for urban combustion management is stable

In recent years, China has introduced a number of policies to support the development of natural gas. In November 2023, the State Council issued the “Action Plan for Continuous Improvement of Air Quality”, which once again emphasizes increasing the substitution of loose coal for civil and agricultural use, implementing clean energy replacement for industrial furnaces, and actively and steadily promoting the replacement of coal with gas.

Against the backdrop of policy support and the moderate recovery of China's economy, the domestic gas market emerged from a period of broad shock in 2023, and natural gas consumption rebounded rapidly from a low base. According to data from the National Development and Reform Commission, China's apparent natural gas consumption in 2023 was 394.53 billion cubic meters, up 7.6% year on year. Compared with the consumption growth rates of 13.6% and -1.7% in 2021 and 2022, respectively, the market is gradually getting back on track. The five major industries of urban gas, industrial fuel, power generation, transportation, and chemical industries all expanded to varying degrees, with year-on-year increases of 7.9%, 6.3%, 7%, 12.1%, and 2.7%, respectively.

In the context of a market where natural gas consumption is slowly recovering, by the end of 2023, Ganghua Smart Energy had 187 urban combustion projects. The projects were spread across more than 20 provinces across the country, and had 16.77 million residential, industrial and commercial customers. As one of the largest urban gas groups in the mainland, Ganghua Smart Energy has actively grasped the market opportunities brought about by the recovery in domestic consumption and favorable industry policies to achieve a “sharp rise in volume and price” in the gas business. The company's gas sales growth rate during the reporting period was higher than the national growth rate, up 8% year-on-year to 16.46 billion square meters. Among them, industrial gas sales, which account for the highest share, also achieved significant growth during the period, from 7.85 billion square meters in the same period last year to 8.33 billion square meters, at a growth rate of 6.1%.

The company stabilized the price spread throughout the year through a flexible and active management strategy. In 2023, the company's gross margin rebounded by 0.01 yuan to 0.51 yuan/square meter year-on-year, and the urban combustion business continued to develop steadily and positively.

In recent years, the blockage of upstream and downstream price transmission of natural gas has been plaguing most urban combustion companies. In order to effectively guarantee the normal operation of urban combustion enterprises, the National Development and Reform Commission takes “control the middle and liberalize the two ends”, that is, “control the distribution price, liberalize the gas source purchase price, and terminal sales price” as the general idea, and issued several documents requiring the rationalization of natural gas sales prices and the establishment and improvement of a simultaneous linkage mechanism between gas source procurement and sales prices to help recover from gas sales gaps. Since 2023, the country has vigorously promoted the improvement and implementation of a favorable price mechanism for residents, and Tianjin, Nanjing, Changzhou and other places have achieved price increases of more than 10%.

Huachuang Securities said that compared to gas for non-residents, the gas price adjustment cycle for residents is longer, and cost management has always been relatively difficult. With the steady implementation of the gas smooth price work for residents, according to incomplete statistics, the average price increase of the first tier price in 2023 was about 0.256 yuan/square meter, an increase of 9.75% over the previous year, which is expected to promote the repair of gas sales margin.

Specifically, when it comes to Ganghua Smart Energy, the company's non-residential price has basically been completed, and about 75% of residents' smooth prices have also been completed, including cities such as Nanjing, Jinan, Qingdao, and Mianyang.

Air source coordination capacity continues to be strengthened

In addition to the promotion of favorable price policies, in order to optimize the company's ability to control costs, Ganghua Smart Energy has always been improving its ability to coordinate self-operated gas sources. In 2023, the company also established a gas supply chain business segment to diversify natural gas resources, optimize the gas source structure, build supply chain integration, and enhance natural gas supply guarantee capabilities.

Through a collaborative development strategy between supply and demand, the company strengthens deepening cooperation with the national pipeline network and “three barrels of oil” to guarantee gas reserves and basic increases, coordinate group needs, and integrate resources. At the same time, the company is also actively obtaining unconventional gas sources such as coalbed methane and shale gas to supplement domestic gas sources. The Zhitong Finance App also noticed that based on the “X+1+X” open pattern of the State Pipeline Network Group, Ganghua Smart Energy and the Jintan Gas Storage Depot, while achieving flexible use and diversified supply of domestic unconventional gas resources, realized a “gas and liquid joint operation” business model with pipeline gas and imported LNG, effectively grasped market opportunities, and achieved cross-seasonal and cross-regional scheduling. By continuing to build a gas supply chain platform, the company's natural gas supply chain's security capabilities and scale advantages have been demonstrated. At present, the company has mastered terminal resources in Tianjin, Tangshan, Dapeng, etc., and has also cooperated with Shanghai Gas and other companies. In August 2023, the company used the national pipeline network window for the first shipment of imported LNG to be handled at the Tianjin LNG terminal of the Hong Kong National Pipeline Network, achieving a historic breakthrough in the independent import of LNG in the gas supply chain.

Up to now, the working gas volume of the Jintan gas storage depot has reached 230 million square meters, and it is estimated that the working gas capacity at full production will reach 1 billion square meters. Furthermore, in terms of international LNG, the company signed a long-term agreement of 1 million tons during the reporting period, and the company's autonomous resource pool is expected to reach 5 million tons in 2027. In the long run, as the turnover capacity of the Jintan gas storage depot increases steadily, the company's international resource pool is expected to continue to expand, and the company's comprehensive gas purchase costs are also expected to be further reduced.

Huachuang Securities pointed out that after experiencing large fluctuations in upstream natural gas prices in 2021-2022, the procurement costs of urban combustion companies are expected to stabilize in the future. At the same time, the price linkage mechanism continues to improve or push urban combustion companies to gradually enter a difficult reversal channel. Companies with gas source advantages and core pipeline network assets may have stronger bargaining power in the industrial chain.

Ganghua Smart Energy said that in 2023, the company and parent company had an operational co-ordinated gas volume of 3.48 billion square meters, accounting for 9.7% of the total gas volume, and cost savings of 320 million yuan during the period. It is estimated that by 2027, the overall total gas volume will account for more than 10% of the company's total gas volume, which will save the company 700 million yuan in costs.

According to the Zhitong Finance App, in the future, with further optimization of gas source costs, it is expected that the company's gross margin will continue to rebound, compounding the increase in gas sales brought about by market recovery, and the profit situation of Ganghua Smart Energy will continue to improve.

The second-highest increase in performance has been achieved

As the company's second growth pole, the renewable energy business was also active during the reporting period.

As the world's largest producer and consumer of energy, China has been actively exploring the development path of energy transformation. With the introduction of the “dual carbon” target, new energy generation has become an important part of the new power system. According to data from the National Energy Administration, the country currently has a total installed power generation capacity of about 2.9 billion kilowatts, of which the installed capacity of renewable energy has reached 1.45 billion kilowatts, accounting for more than 50% of the country's total installed power generation capacity, which historically exceeds that of thermal power generation.

In addition to steady development in the traditional gas industry, many urban combustion companies are laying out the new energy sector to seize the incremental potential of this “blue ocean market.” Ganghua Smart Energy is no exception. Since the company announced the development blueprint for the distributed photovoltaic market in 2021, as of the end of December 2023, the company has developed renewable energy projects in 23 provinces, autonomous regions and municipalities. Through the three core strategies of “integrated energy, decarbonization, and digital intelligence”, the company provides a wide range of industrial and commercial customers with comprehensive energy services, including photovoltaics, multi-energy (cold, heat, electricity) co-supply, energy storage, charging and switching, carbon trading, green power trading, engineering services, energy saving, and digitalization.

Among them, distributed photovoltaic projects, as a key pillar of the company's renewable energy sector, progressed rapidly during the reporting period. By the end of December 2023, the company had signed a total of 2.96 gigawatts of PV installed capacity and 1.8 gigawatts connected to the grid.

It is worth mentioning that on December 5, 2023, the Angang Lianzhong 29.13MW distributed photovoltaic power plant with the largest single capacity distributed photovoltaic power plant in Guangdong Province, was connected to the grid for power generation by Ganghua Smart Energy. The Zhitong Finance App learned that the project uses a “spontaneous use, surplus electricity to the Internet” grid-connected model, making full use of the 300,000 square meter factory roof resources in the factory area to lay solar panels. While revitalizing “invisible” idle assets, it also brought considerable economic and ecological benefits. According to estimates, the project can provide the company with 30 million kilowatt-hours of clean electricity every year, save about 7,500 tons of standard coal, and reduce carbon dioxide emissions by 20,000 tons. At present, the company has implemented the development of 124 zero-carbon smart parks, adding 44 new ones in 2023. The market size is 18 GW, and the electricity consumption scale is 200 billion kwh/year.

Tianfeng Securities earlier released a research report stating that traditional industrial parks have strong demand for carbon reduction and stable energy use, and there is strong demand for distributed photovoltaic installations. Especially for companies in traditional business formats such as gas, the transformation of integrated energy services will give full play to park management experience, operation and maintenance experience, and team advantages, bringing huge room for growth in future performance.

In 2023, based on “everything starts from the carbon reduction needs of industrial and commercial customers”, the company joined seven group companies to launch the Hong Kong and China “Seven Star Service Plan” to meet the individual needs of different enterprise customers. With the steady deepening of Hong Kong and China's advantages, the company's renewable energy business also achieved a profit of HK$78 million for the first time during the period, showing a strong growth trend.

In response, Ganghua Smart Energy said that distributed industrial and commercial photovoltaics is only the first step in the “dual carbon” strategy for Ganghua Energy service customers, and smart energy management and one-stop carbon power services are also progressing steadily with leading companies in key industries. The company plans to further expand PV power generation revenue to PV management benefits including AuM, development, EPC and operation and maintenance services, and plans to gradually transform PV customers into microgrid customers to withstand the risk of fluctuations in PV electricity prices.

It can be seen that Ganghua Smart Energy is continuing to advance towards the goal of “becoming a leading enterprise in one-stop energy management” through practical actions. Looking ahead to 2024, the company expects the total installed capacity of distributed photovoltaics connected to the grid will reach 2.8 GW, and the power generation capacity will reach 1.9 billion kwh.

Summarize

Urban Fuel has always been viewed as a representative of steady operation, and has outstanding value stock attributes, which also makes investors often overlook its growth potential. Facing the advent of the “dual carbon” era, in this new era of industry, some enterprises with a keen “sense of smell” have already begun transformation and transformation to save energy for their own long-term growth.

This is probably the case where Ganghua Smart Energy is responding to the country's “double carbon” and ensuring a stable basic market for the urban combustion business, innovates and seeks change, and accelerates the layout of new tracks with endless potential, such as the “carbon economy” and new energy sources, so as to add new momentum for the company's future development. Seen from this perspective, a Hong Kong China with more diversity and more room for growth is worth looking forward to in the market.