1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 42.3 billion yuan, YoY -1%; net profit to mother of 3.15 billion yuan, YoY -8.1%, net profit to mother of 3.15 billion yuan, YoY -23%, corresponding to earnings of 2.50 yuan per share. 1H24 results are in line with our expectations. The company plans to pay an interim dividend of HK$0.85 per share, with an interim dividend ratio of 30.9% and YoY +5.7 ppts.

1H24 Beijing Gas achieved 11.83 billion square meters of natural gas sales, YoY -2.4%, of which pipeline gas sales in Beijing were 9.36 billion square meters, YoY +1.4%.

In terms of joint ventures/joint ventures, 1H24 confirmed investment income of 12.4/0.46/0.46/0.28 billion yuan for Beijing Pipeline/Beikong Water/VCNG/China Gas.

Development trends

The investment recovery method for the Nangang LNG project has not yet been finalized. The gross profit of 1H24's gas business decreased by 0.34 billion yuan over the same period last year. We believe the main reason was the increase in depreciation and amortization and operating costs due to the commissioning of the first phase of the Tianjin Nangang LNG project. At the performance meeting, the management stated that the company will apply to the government to include the Nangang LNG project as an effective asset for investment recovery, but at present, specific details such as the permitted return rate and operating incentives for the Nangang project are still being negotiated and communicated with the government. Considering the high investment scale of the Nangang project (total investment of 20.1 billion yuan), we believe that the subsequent investment recovery model may have a great impact on the company's profit and dividend payment capacity.

The scale of capital expenditure may be further reduced from 2025. Based on the construction progress of the Tianjin Nangang LNG Project Phase II and Phase III projects, we expect that the capital expenditure scale of the company's gas business may be further reduced to 2-3 billion yuan/year from 2025 (the gas sector completed capital expenditure of 4.5 billion yuan in 2023), and the capital expenditure intensity of the gas project will decrease or drive the company's overall capital expenditure scale to 5-6 billion yuan/year, opening up room for the company to further increase shareholder returns.

There is still room for improvement in the performance of joint ventures. We judge that benefiting from the increase in gas transmission/gross margin improvement/increase in the water price adjustment ratio, there is still room to improve the profitability and dividend capacity of the national pipeline network Beijing Pipeline/China Gas/Beikong Water Services in the next 2-3 years.

Profit forecasting and valuation

The profit forecast for 2024 and 2025 remains largely unchanged. The current stock price corresponds to the 2024/2025 price-earnings ratio of 5.9x/5.2 times. Maintaining an outperforming industry rating and a target price of HK$28.00, corresponding to 6.4 times the price-earnings ratio of 2024 and 5.6 times the price-earnings ratio of 2025, with 9.2% upside compared to the current stock price.

risks

Prices of natural gas and crude oil fluctuate greatly, and there is a risk of exchange rate fluctuations.