2023 results fall short of our expectations

The company announced its 2023 results: revenue of 82.31 billion yuan, +3.7% year on year; net profit of 5.50 billion yuan, corresponding to profit of 4.36 yuan per share; excluding one-time profit (company caliber) of 4.88 billion yuan, the company's 2023 performance was lower than our expectations. We believe that the cost pressure caused by Beijing Gas due to early heating season and spot procurement of LNG, etc., has not been fully managed, causing its operating profit to drop by about 1 billion yuan year on year.

In 2023, Beijing's gas and gas sales volume was 24 billion square meters, +10.6% year over year, of which gas sales in Beijing were 181 billion square meters, +1.7% year over year.

In terms of joint ventures, benefiting from the increase in gas transmission volume, the Beijing Pipeline of the State Pipeline Network contributed 2.44 billion yuan in annual investment income, +36.7% over the same period last year. In addition, Rosneft VCNG/China Gas/Beikong Water contributed 10.5/5.9/78 billion yuan in investment income.

The company plans to pay a final dividend of HK$0.67 per share, with a total dividend of HK$1.6 per share for the whole year, the same as the previous year, with a payout ratio of 33.1%.

Development trends

The investment recovery method for the Nangang LNG project is still under negotiation. At the performance meeting, the management stated that the Nangang LNG project has entered commercial operation in December 2023, and the company will apply to the government to include the Nangang LNG project as an effective asset for investment recovery in Beijing. Currently, specific details such as the permitted return rate and operating incentives for the Nangang project are still being negotiated and communicated with the government. Considering the high investment scale of the Nangang project (total investment of 201 billion yuan), we believe that the subsequent investment recovery model may have a great impact on the company's profit and dividend payment capacity.

The performance of joint ventures may improve in 2024. We judge that benefiting from the increase in gas transportation/improvement in gross margin and the declining share of construction business, the profitability and dividend capacity of the national pipeline network Beijing Pipeline/China Gas/Beikong Water Services is expected to continue to increase year-on-year in 2024. Furthermore, the recent rebound in oil prices has also laid a good foundation for Rosneft's VCNG project to maintain a reasonable and stable profit.

Profit forecasting and valuation

Taking into account the fact that the gas cost transmission mechanism in Beijing has not been completely rationalized and the company's financial statements have been disrupted by RMB, we lowered our net profit forecast for 2024 by 28% to 6.05 billion yuan and first introduced a net profit forecast of 6.402 billion yuan for 2025. The current stock price corresponds to 4.2x/3.8xp/E for 2024/2025. Considering that the company's current dividend ratio is still attractive to medium- and long-term investors, and considering profit forecast adjustments, we lowered our target price by 30.0% to HK$28.00, corresponding to 2024/2025 5.2x/4.7x P/E, with 23.4% upside compared to the current stock price.

risks

LNG prices fluctuated greatly, and price transmission progress was lower than expected.