Net profit to mother in 2023 was +10% year over year, profit forecast and target price China Resources Gas released its annual report. In 2023, the company achieved revenue of HK$101.3 billion (+7% YoY), net profit to mother of HK$5.2 billion (+10% YoY), and net profit to mother was lower than Huatai's forecast (HK$5.6 billion). The main three expenses were higher than expected. The slowdown in mergers and acquisitions led to a decline in epitaxial growth, which lowered the year-on-year growth rate of sales; in some provinces, surplus prices lagged behind, and gross margin forecasts were lowered. We expect net profit to be HK$58/63/6.9 billion for 24-26 (previous value: HK$61/68/- billion). We lowered our target price slightly to HK$32.37, corresponding to 13x 2024E PE (previous value: HK$34.45, corresponding to 13x 2024E PE), which is equal to the stock's five-year historical average (13 times). We are still optimistic about China Resources Gas's 24-26 profitability recovery, especially the growth potential of the integrated services and integrated energy business. The company's dividend policy is robust, and a potential dividend ratio of 5.0/5.5/ 6.0% is expected for 24-26. Maintain “buy-in.”
The gas volume growth is better than the industry average, and there is still room for predictability. The company's gas sales volume in 2023 was +8.1% to 38.8 billion square meters, higher than Huatai's forecast (+7.7%), and also better than the national apparent growth rate (+7.6%); among them, industry +7.2% /commerce +9.0% /residents +11.1%; due to effects such as demand recovery and low base, 2H23's gas sales growth accelerated to 9.3%. However, as the number of mergers and acquisitions of the company decreases, epitaxial sales volume may decline, and we lowered the 24-25 year-on-year sales growth rate to 7.6/ 7.0% (previous value 9.7/ 8.7%). In 2023, the company's gross sales margin increased 6 points/square year on year to 0.51 yuan/square meter, of which the net price ratio for residents reached 60%. Taking into account the lag in net prices for residents in some provinces, we lowered the 24-25 gross sales margin to 0.52/0.54 yuan/square meter (previous value: 0.54/0.56 yuan/square meter).
The decline in new connections may narrow. Comprehensive services are expected to relay the company's new connections to 3.31 million in 2023, better than Huatai's forecast (3.25 million households); we raised the number of new connections to 300/2.7 million households in 24-25 (previous value: 275/2.35 million households), mainly considering: 1) the penetration rate of residential users is only 59.3%, and there is still room for improvement; 2) Urban village renovation opportunities, and 2.89 million households were signed in 2023. The share of the company's gas connection operating profit fell to 31% in 2023. We expect it to decline year by year in 24-26 (27/23/ 18%), and the impact of connectivity on profit and valuation will weaken. The company has high-quality customer resources, and the number of customers in third-tier cities accounts for 73%. The integrated service business is expected to relay to the connecting business. We expect the CAGR of comprehensive service operating profit to reach 18% in 24-26.
Strategic capital peaked and declined, and steady dividends showed long-term value
The company's capital expenditure fell year-on-year to 6.8 billion yuan to 7.9 billion yuan in 2023, of which strategic capital expenditure fell 5.7 billion yuan from the 2022 high; as the number of company mergers and acquisitions projects decreases, we expect strategic capital expenditure to continue to decline in 2024. In 2023, the company plans to pay HK115.69 cents per share (+10% YoY). The dividend ratio is the same as 50% year over year, and the current dividend rate is 4.6%. The company adheres to a steady dividend payment policy, which helps stabilize market confidence and highlights long-term value. As the company's profitability gradually recovers and free cash flow continues to increase, we expect a potential dividend ratio of 5.0/5.5/ 6.0% for 24-26.
Risk warning: The recovery in demand for natural gas fell short of expectations, and there is uncertainty in the global gas market.