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The company published its 2023 annual report. In 2023, the company achieved operating income of HK$101,272 billion, an increase of 7.35%; profit attributable to the owners of the company was HK$5.224 billion, up 10.36% year on year; paid interim dividends and proposed final dividends per share totaled HK$1.1569 per share, an increase of 10.18% year over year.

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Retail: The scale of retail gas has grown steadily, and profitability has greatly improved in terms of gas sales. In 2023, the country's apparent consumption of natural gas was 394.53 billion square meters, an increase of 7.6% over the previous year.

The company's annual retail gas volume increased 8.1% year-on-year to 38.78 billion square meters, higher than the national growth rate in the same year. In terms of gas sales structure, residential gas volume increased 11.1% year on year to 9.44 billion square meters; commercial gas volume increased 9% year on year to 8.21 billion square meters year on year, and industrial gas volume increased 7.2% year on year to 201.1 billion square meters. Among them, general equipment manufacturing, electrical machinery and equipment manufacturing, and automobile manufacturing are the top three industries for the increase in industrial gas volume.

In terms of gross margin, in 2023, the National Development and Reform Commission issued the “Guiding Opinions on Establishing and Improving the Upstream and Downstream Price Linkage Mechanism for Natural Gas”. The company is also making every effort to guide terminal prices. The gross margin of gas sales reached 0.51 yuan/square meter for the whole year, an increase of 0.06 yuan/square meter over the previous year. Driven by the recovery of gas volume and gross margin, the company's gas sales profit reached HK$7.6 billion, an increase of 29.4% over the previous year. Among them, the profit growth rate in sales reached 39.1% in the second half of '23.

Continuously explore market space and expand business scale

In 2023, there were 4 new registration projects at the group level, 3 new projects signed at the member enterprise level, and 4 new registration projects. During the year, the company completed the financial consolidation of Chongqing Gas, an increase in shares in the Xiamen project, and the holding of Kunming Gas, continuously expanding its market space and consolidating the basic market of the main gas business.

Make every effort to promote the expansion of integrated service business and integrated energy business

Comprehensive service business: The company's comprehensive service business includes kitchen appliances, heating, insurance agents, and housing services. For the full year of 2023, the integrated services business achieved operating income of HK$4.04 billion, an increase of 27% over the previous year, and realized segment profit of HK$1.37 billion, an increase of 19% over the previous year.

Comprehensive energy business: At the same time, relying on the resources of 480,000 industrial and commercial users brought by the main urban combustion business, the company is also actively developing a comprehensive energy business. The annual integrated energy business achieved a turnover of HK$1.64 billion, an increase of 72.8% over the previous year; gross profit reached HK$270 million, an increase of 120.7% over the previous year. According to the company's estimates, the installed capacity of the comprehensive energy market in the company's business area is about 360 GW, of which 1.8 GW has been developed, and the development ratio is only 0.5%; the energy demand in the operating area may reach 800 billion kilowatt-hours, and the energy supply in 2023 is only 2.9 billion kilowatt-hours (year-on-year growth rate of 58.5%), so the comprehensive energy business has a lot of room for development.

In terms of dividend payments, the company plans to pay HK$1.1569 per share in 2023, an increase of 10.2% over the previous year; the annual dividend ratio is 50.3%, the same as in 2022. The payout ratio in 2023 was 20.5pct higher than in 2016. As of the close of trading on March 28, 2024, the 2023 dividend corresponding to the 2023 dividend was approximately 4.6%.

Profit forecast and valuation: The gradual return of the market to normal in 2024, the gradual recovery of downstream natural gas demand, and the continued promotion of the favorable price policy will have a positive impact on the company's gross sales margin, but the market is still in a fragile balance and faces many uncertainties. We expect the company's net profit to be HK$57.3, 63.7, and 7.15 billion HK$7.15 billion in 2024 and 2025, respectively, with year-on-year increases of 9.7%, 11.2% and 12.2%, respectively. Corresponding PE is 10.1, 9.1, and 8.1 times, respectively, to maintain a “buy” rating.

Risk warning: macroeconomic downside risks; upstream gas prices rise above expectations; downstream surplus prices fall short of expectations; international gas prices fluctuate beyond expectations; the expansion of the company's integrated service business and integrated energy business falls short of expectations; the policy side has exceeded expectations for the natural gas industry, etc.