The company's core earnings surged 57% YoY to HK$707m in 1H24, beating our forecast by 5%. The outstanding growth of its renewable business and lower finance cost were the key growth drivers. We expect its earnings to grow 36% HoH in 2H24 on further improvement in dollar margin and higher contribution from its renewable business. We trim our EPS forecasts by 7-10% for 2025-26 as the company intends to further slow down the investment in its renewable business. However, this will help to improve its near-term free cashflow. Hence, we reiterate our BUY call with target price increased to HK$4.41.

Key Factors for Rating

The strong growth in core earnings was mainly driven by the 18x YoY jump in operating profit of its renewable business to HK$164m in 1H24. Its PV power generation jumped 1.43x YoY to 0.68bn kWh as its grid-connected PV generation capacity increased from 1.1GW by the end of 1H23 to 2.1GW by the end of 1H24. On top of the PV power generation, the earnings from asset light operations like energy and carbon management services jumped 3x YoY to RMB28m. This will be another growth driver for the renewable business.

For the gas distribution business, its total gas sales volume grew 6% YoY (or 4% YoY for retail gas). Dollar margin improved from RMB0.50/m3 in 1H23 to RMB0.52/m3 in 1H24 (or from RMB0.54/m3 to RMB0.56/m3 for retail gas). Progress in increasing end-user residential gas price and increase in self- managed gas supply helped to lift margin. While the operating profit of gas sales slipped 5% YoY, the profit actually grew 6% YoY after including profits from JVs and associates.

We expect the company's earnings to grow 36% HoH in 2H24. The dollar margin of retail gas in 2H24 should improve to RMB0.58/m3 based on its full- year guidance. In addition, the volume of PV power generation is targeted to increase 43% HoH.

The company is trading at 6.1x 2024E P/E, the lowest among its peers. We think it is unreasonable as it is likely to outgrow its peers given the expected rapid growth of its renewable business.

Key Risks for Rating

Execution risk of its renewable business.

Faster-than-expected fall in new connections.

Valuation

Despite the cuts in our earnings forecasts, this comes with smaller capex and improved free cashlfow and smaller net debt in next few years. Hence, we raise our DCF valuation from HK$4.10 to HK$4.41. This is equal to 9.4x 2024E core P/E.