1H24 core performance exceeds market expectations

The company announced 1H24 results: revenue of HK$10.5 billion, +6.3%; net profit to mother of HK$0.743 billion, corresponding to profit of HK$0.22 per share. After excluding non-operating profit and loss, 1H24's core profit was HK$0.707 billion, +57% YoY. 1H24's core profit exceeded market expectations, mainly due to 1) 1H24 renewable energy business (distributed photovoltaics) achieved net profit of HK$0.164 billion (YoY + HK$0.161 billion). 2) Financial expenses of 1H24 headquarters were -16% to HK$0.276 billion year-on-year.

1H24's natural gas sales volume was 8.74 billion square meters, +6% YoY, gross margin 0.52 yuan/square meter, +0.02 yuan/square YoY, and added 0.165 million households connected to the meter, -9.2% YoY.

Development trends

The 2024 gross margin may exceed expectations. Benefiting from the transmission of gas costs to residents and declining gas procurement costs, the profitability of 1H24's gas retail business has improved. Taking into account the restoration of industrial and commercial gas volume and the progress of household gas prices, the management revised the gross margin guideline for the full year 2024 from +0.01 yuan/square YoY to +0.02 yuan/square YoY, and adjusted the annual gas volume guideline from +8% YoY to +7% YoY. Looking ahead, we believe that if the spot price of LNG does not rise sharply during the heating season, the company's gross margin may exceed management guidelines.

Renewable energy business strategy adjustments may help bridge the valuation gap compared to peers. As of August 15, Ganghua Smart Energy traded at 2024E 6.6x P/E, with a valuation discount of more than 30% compared to China Resources Gas. We believe that the core reason for the company's valuation discount was market concerns 1) the stability of the company's medium- to long-term returns in the renewable energy business, and 2) the impact of large capital expenses in the renewable energy business on the company's cash flow and balance sheet. At this point, we have observed that the company is gradually adjusting the installed capacity plan for the renewable energy business (management downgraded the new installed capacity from 1 GW to 0.5 GW at the performance meeting, and indicated that the new installed capacity will be added or maintained at around 0.5 GW in the next 2-3 years). We believe this also shows that the company is switching the renewable energy business growth model from simple scale in the past (driven by large-scale capital expenditure) to guarantee profit and cash flow matching. Looking ahead, we believe that as the profitability of the renewable energy business increases and cash flow improves, the company's valuation gap compared to peers may be reduced.

Profit forecasting and valuation

Considering that profits from the renewable energy business have begun to be realized, we raised our 2024/2025 net profit by 8%/8% to HK$1.568 billion/ HK$1.838 billion. The current stock price corresponds to 2024/2025 6.6x/5.6x P/E. Maintaining an outperforming industry rating and a target price of HK$3.80, corresponding to 2024/2025 8.4x/ 7.2x P/E, with 28.0% upside compared to the current stock price.

risks

Natural gas prices have fluctuated greatly, and the decline in real estate has exceeded expectations.