FY24 core profit -4.3% YoY, dividend of 50 HK cents per share corresponding dividend rate of 7% China Gas released FY24 results (April 23 to March 24), FY24 achieved revenue of HK$81.4 billion (-11.5% YoY), and shareholders should account for core profit of HK$3.97 billion (-4.3% YoY), lower than Huatai's forecast (HK$4.68 billion); the company's operating profit margin rebounded year on year, but impairment and exchange losses affected profit performance; the company's free cash flow ratio +70% Payments and capital expenses have declined.
We expect China Gas's profit forecast for FY25-27 to be HK$41.9/46.4/5.18 billion (previous value: HK$55.0/66.0/- 100 million HKD) and EPS of HK$0.77/0.85/0.95, including a reduction in retail gas growth rate, gross margin and gas connections. The target price for the company was HK$8.47 (previous value of HK$9.47), predicting PE based on 11xFY25, which is equal to the historical average of the company's PE-FTM. The company plans to pay a final dividend of HK35 HK cents per share, corresponding to the full year's net profit payout ratio of 69%/85%, and the current dividend rate of 7%. Considering the company's steady profit and free cash flow, we expect FY25-27 dividend per share to remain at a good level, with significant characteristics of high dividends. Maintain “buy-in.”
Retail volume increased slightly, and gross margin picked up as scheduled
The company's FY24 retail gas volume was +2.2% year-on-year to 23.5 billion square meters, of which residents +3.4% /industry +0.3% /commerce +8.3%. Demand for gas in export trade and real estate-related industries among industrial customers was weak. The company's FY24 retail gas gross margin was +8 points/square year over year to 0.50 yuan/square, thanks to the smooth implementation of consumer prices and the reduction in non-residential procurement costs. Considering that demand for industrial gas has yet to recover, we adjusted the year-on-year growth rate of the company's FY25-27 retail gas volume to +5%/+4% (previous value +7% /-). Taking into account the promotion of the domestic gas price policy and changes in the share of industrial gas volume, we adjusted the company's FY25-27 retail gas gross margin to 0.53/0.55/0.57 yuan/square (previous value 0.54/0.57/-yuan/square meter).
The scale of gas connections and profit contributions continue to decline
With the restructuring of the domestic real estate industry and the end of rural coal-to-gas conversion, the number of the company's gas connected customers has dropped sharply from the historical peak (FY20:5.43 million households), and FY24 added 1.66 million new connected households (-28% over the same period last year). Considering that the urbanization process in China continues to advance, there is still room for improvement in the gas gasification rate. As of the end of March '24, the gasification rate of residents in the company's gas business area was 70.9% (+2.3 pct compared to the previous year).
We expect FY25-27 to add new connections or continue to decline, but the deceleration rate will gradually narrow, and the profit contribution of connections (gas connection+engineering business) is expected to fall within 15% (FY24:19%).
Value-added services continue to grow, and comprehensive energy has achieved breakthroughs
The company's FY24 value-added service revenue +5.8% YoY to HK$3.65 billion, operating profit +5.7% YoY to HK$1.58 billion, and +9.3% YoY after excluding exchange rate factors. The total installed capacity of the company's integrated energy reached 221.6 MWh at the end of the FY24 period, of which energy storage for industrial and commercial users reached 112.7 MWh; China Combustion Smart Energy developed industrial boiler gas supply projects using biomass gasification technology, focusing on economically developed regions. We believe that value-added services and integrated energy are expected to become new profit growth points for the company in FY25-27.
Risk warning: Natural gas demand growth is slowing; new businesses are falling short of expectations.