Key points of investment:

Ganghua Smart Energy announced 2024 interim results: achieved operating income of HK$10.501 billion, an increase of 6.3% over the previous year. Operating profit was HK$0.935 billion, up 26.0% year over year. The company achieved net profit of HK$0.743 billion, a year-on-year decrease of 33.4%, mainly due to the confirmation of non-operating income of HK$0.6 billion in the same period last year due to withdrawal from the Shanghai Gas Project. Excluding this factor, the company's core profit for the first half of the year was HK$0.707 billion, a year-on-year increase of 57.5%, which is basically in line with our expectations.

The net price for businesses and residents continues to improve, and gross margins are rising steadily, and there is still plenty of room for improvement. The total gross margin of the company's gas sales in the first half of 2024 was 0.52 yuan/m (+0.02 yuan/m), of which the gross margin of urban gas sales was 0.56 yuan/m (+0.02 yuan/m). On the one hand, the increase in gross margin benefits from timely industrial and commercial prices. On the other hand, in the context of the “Third Plenary Session of the Central Committee” to optimize the tiered water price, electricity price, and gas price system for residents, the gas price ratio for corporate residents has also continued to advance steadily. In the second half of 2024, we are optimistic that the part that has already completed the smooth price will continue to contribute to the increase in performance. It is expected that the smooth price work in the rest of the region will also accelerate, further expanding the space for residents to have poor climate. In terms of gas source structure, the company and parent company Hong Kong and China Gas centrally discuss gas volume prices, enhance negotiation capabilities and optimize supply costs. Regarding the gas volume gap, the company actively broadens gas source procurement channels, cooperates with urban fuel companies including Fuyuan Energy and Xintian Green Energy, and enhances the ability to negotiate with overseas suppliers. By combining internal and external efforts, the company is expected to continue to make full use of overall efficiency, reduce comprehensive intake costs, and enhance the profitability of the main gas sales business.

Gas sales are growing steadily, and the impact on the connectivity business is manageable. In the first half of 2024, the company added 3 new urban gas projects, bringing the total number of urban combustion projects to 190; the number of users increased by 0.45 million, reaching a total of 17.22 million. The company's total gas sales rose steadily to 8.74 billion in the first half of the year, up 6.2% year on year. Upstream gas prices continue to fall, imported natural gas releases high economy, compounded by the continuous release of downstream demand, and the company's high-margin retail gas volume is growing steadily. 1H24's industrial gas volume increased by 4.6% and commercial gas volume by 9.4%. In terms of wholesale gas, power plant gas consumption and other gas distribution also increased by 11.3%. Affected by the continued downturn in the mainland real estate market, the number of connected users for corporate residents dropped 11% year on year to 0.335 million. Although the number of connected users of new homes dropped a lot, the number of connected users of old houses increased year on year. Combined with the 2% increase in connection fees for residential users, this partly offset the decline in the number of new resident users. The net profit of the company's gas business in the first half of 2024 was HK$0.851 billion, up 2.3% year over year. The recovery in downstream demand is compounded by an improvement in gross sales margin, and the volume and price of the company's main gas sales business is expected to continue to rise.

The photovoltaic business realized its high growth potential and greatly enhanced the company's performance. By the end of the first half of 2024, the company had contracted 3.3 GW of installed capacity, including 2.1 GW connected to the grid, an increase of 1 GW over the same period last year. 1H24's photovoltaic power generation capacity increased dramatically by 143% to 0.68 billion kilowatt-hours, achieving a profit of 0.195 billion yuan from the photovoltaic power generation and service business, which led to a year-on-year increase of 0.148 billion yuan in net profit from the renewable energy business. The company adopted a steady cash flow strategy to adjust the annual scale of new PV connected to the grid to 500 MW. In the context of dual carbon, the prosperity of the photovoltaic installation business has increased over a long period of time, and there is strong certainty. Cooperation between the company and capitalists has deepened, financial risks have been reduced, and asset-light operation methods such as energy and carbon services have been combined to improve the overall return on the project.

Maintain a “buy” rating. The company's main sales business performed steadily, and the high growth in the photovoltaic business added momentum to growth. We maintained our 2024-2026 net profit forecasts of HK$1.728, 1.873, and HK$1.982 billion, respectively. The current stock price corresponding to 2024-2026 PE is 5.8, 5.3, and 5.0 times, respectively. The main gas business can provide stable cash flow for a long time, laying a solid foundation for the development of the renewable energy business. The company has both stability and growth. Currently, the company's PB is only 0.5 times, there is plenty of room for valuation repair, and it maintains a “buy” rating.

Risk warning: The cost of purchasing natural gas has risen sharply, and the growth rate of gas sales falls short of expectations.