1H24 Core Profit +2% YoY; adjust profit forecast and target price

Hong Kong China Gas announced interim results, with 1H24 revenue of HK$27.5 billion, -6% YoY, core profit of HK$3.186 billion, +2% YoY, and net profit of HK$3.04 billion, or -16% YoY. 1H24 Hong Kong's gas sales remained flat year on year, gas sales in mainland cities were +7% year over year, price spread rebounded by 5 points/square meter year on year, and renewable energy achieved a net profit of HK$0.164 billion. Referring to changes in 1H24 core operating data and slightly adjusting the profit forecast, we expect the company's net profit to be HK$6.08/6.61/7.19 billion (previously HK$6.1/6.9/7.47 billion) and BPS of HK$3.18/3.19/3.22. Referring to the 3-year average PB value of the company's history, the company focuses on its core business and the return on free cash flow is expected to increase. The company will be given 2024E 2.4xPb, with a target price of HK$7.63 (previous value of HK$7.66). The company plans to pay an interim dividend of 12 HK cents per share, the same as the previous year. Maintain a “buy” rating.

Hong Kong Gas: Industrial and commercial sales hedge against a decline in residential sales, August price adjustments relieve cost pressure

1H24's gas sales volume was 14,932TJ, which was basically the same year on year. Among them, residential gas volume was -2% year-on-year, and commercial/industrial gas volume was +2%/+8% year-on-year, due to the recovery of the tourism and aviation industry and the promotion and application of environmentally friendly gas equipment. The company has raised its gas charges since August, with the standard fee increase of 4.8%, an increase of 1.3 HK cents per MJ, continuing the two-year price adjustment cycle, and increasing the monthly maintenance fee by 0.5 yuan/household for the first time in 26 years; the company's gas price adjustment fully conveys changes in upstream procurement prices, labor and operating costs. We expect the revenue of the Hong Kong division to be relatively stable in 2024-2026, while the EBITDA profit margin is expected to remain at around 50%.

Mainland Urban Fuel: Gas sales have maintained a relatively rapid growth, and the price difference repair for the whole year is expected to exceed expectations

1H24's urban gas sales reached 18.6 billion square meters, +7% year over year. Among them, industrial gas volume was +3% year over year, gas volume in the “new three” industries (electric vehicles/lithium batteries/photovoltaics) grew rapidly, and commercial/residential gas volume was +9%/+8% year over year, thanks to the low base effect in the same period last year. 1H24 companies' overall and urban gas price differences were 0.47/0.50 yuan/square, respectively, up 5 points/square from year to year, thanks to the 9 points/square drop in gas purchase costs and 10/17 cents/square meter year-on-year increase in the average resident/commercial gas sales price. In the second half of the year, the residential gas price is expected to restart and combine the company's gas supply coordination results. The price spread for the whole year is expected to be 2 points/square higher than our previous expectations.

Renewable energy: Profits increased dramatically, with the asset-light model taking into account performance flexibility and cash flow, 1H24's industrial and commercial distributed PV installed capacity increased by 1.0 GW year on year, of which the cumulative grid-connected volume reached 2.1 GW at the end of June; PV power generation capacity was +143% to 0.68 billion degrees, and gross electricity consumption fell 4 points to 0.30 yuan year over year, mainly affected by the reduction in the length of time in Rizhao; the company's renewable energy sector 1H24 business profit was +259% year-on-year to 0.223 billion yuan, including PV business/aUM sales/energy Carbon services were 0.152/0.043/0.028 billion yuan respectively, achieving net profit of 0.151 billion yuan, an increase of 0.148 billion yuan over the previous year. The company adopted a steady cash flow strategy and lowered the 2024 new installed capacity plan to 0.5 GW.

Risk warning: Hong Kong's gas demand falls short of expectations; Mainland gas demand falls short of expectations; borrowing cost control falls short of expectations.