Core profit fell 5% year over year in 2023, lowering profit forecast
In 2023, Tianlun Gas achieved revenue of RMB 7.7 billion (+2% YoY), net profit of RMB 480 million (+8% YoY), and core profit of RMB 580 million (-5% YoY); the decline in core profit was mainly due to a decrease in engineering installation and service business; core profit was slightly higher than Huatai's forecast ($570 million).
Demand for gas consumption is recovering weakly, and the retail gas volume growth forecast is lowered; we expect core profit of RMB 5.9/6.6/72 billion (previous value: RMB 6.4/7.3 billion) for 24-26, corresponding to core EPS of RMB 0.60/0.67/0.74 yuan. We raised the target price to HK$5.27, based on an 8-fold PE forecast for 2023 (previous value: HK$4.46, based on 7x 2023E PE), which is higher than Tianlun's 5-year historical PE average of 5.4x. The company maintained a dividend ratio of 30% for 23 years, corresponding to a dividend rate of 3.9%. Considering the slowdown in the company's performance growth rate and the relatively unattractive dividend ratio, it was lowered to “increase holdings.”
Retail sales volume increased slightly year-on-year, and the gap in sales was gradually corrected
According to the results announcement, Tianlun's sales revenue in 2023 was +7.3% year-on-year (retail +4.4%, wholesale +24.5%), and operating profit margin increased 1.8pp to 8.2% year over year. Tianlun's retail gas volume increased 4.5% year-on-year to 1,741 million square meters in 2023, with resident/industrial/commercial/transportation retail gas volume +5.5%/+3.0%/+17% year-on-year respectively. The gross margin of comprehensive gas sales was fixed in 2023 from 0.06 yuan/square meter to RMB 0.48 per cubic meter, thanks to continued smooth price implementation and high gross traffic gas volume growth. The retail gas volume growth rate in 2023 is low, and gas demand is still in a weak recovery stage. We lowered the 24-25 retail gas growth forecast to 6%/6% (previous value: 8%/8%); the net price for residents is expected to be implemented, and we adjusted the gross sales margin to RMB 0.52/0.52 per square meter for 24-25 (previous value: 0.49/0.50 yuan/square meter).
The volume of new connections increased sharply over the same period last year, and value-added services grew rapidly
According to the results announcement, Tianlun reached 301,000 new residential users in 2023 (-14% YoY), including 284,600 urban fuel households (+0.7% YoY)/16,500 township households (-76% YoY), adding 4,518 industrial and commercial users (-8.5% YoY). In 2023, revenue from the engineering installation and service business decreased 26% year over year, while operating profit margin increased 3.3 pp to 45.9% year over year. Taking into account the impact of the real estate cycle, we maintain a forecast of 26,000/250,000 new connections over 24-25 years. In 2023, the company's value-added service revenue was +12% year-on-year, thanks to cost reduction and revenue growth and expansion of business channels. The company is gradually forming its own brand service system, and value-added services are expected to partially offset the impact of the decline in connectivity.
Risk warning: The growth rate of gas sales was lower than expected, the decline in gross gas sales exceeded expectations, and the number of new connections fell more than expected.