1H24 performance exceeded our expectations

The company announced 1H24 results: revenue of HK$52.1 billion, YoY +7.7%; excluding one-time consolidated factors affecting net profit to mother of HK$3.46 billion, YoY +21.2%, net profit to mother of HK$3.46 billion, YoY -2.5%, corresponding to earnings per share of HK$1.52, higher than our expectations, mainly due to the 1H24 gross margin exceeding expectations and recovering to $0.54 per square meter (YoY+0.04 yuan/square meter). The company plans to pay an interim dividend of HK$0.25 per share and YoY +0.1 HKD/share.

1H24 has a gas sales volume of 19.84 billion square meters, YoY +5%, gross margin of 0.54 yuan/square, YoY +0.04 yuan/square, adding 1.03 million new residents connected to households, YoY -23%; revenue from the integrated services business is HK$1.77 billion, YoY +20%.

Development trends

2H24 gross margin may still have room to rise. Benefiting from the increase in the net price ratio of residents and the optimization of the resource pool structure, the improvement in gross margin in 1H24's natural gas sales business remained leading the industry. Looking ahead to 2H24, considering that the heating season in the second half of the year is short and that the company's urban combustion projects such as Tianjin have announced that residential price adjustments will be made in the near future, we believe that 2H24's gross margin may still have room for month-on-month improvement, and the gross margin for the whole year may exceed the current guideline of 0.53-0.54 yuan/square meter given by management.

The number of connected households is expected to remain at 2.5-3 million in the next 2-3 years. Affected by the downturn in the real estate industry, the company's connectivity business has continued to be under pressure since 2023. Looking ahead, considering that as of 1H24, the company's resident user penetration rate is still below 5-10 ppts of the same industry and the quality of the company's urban gas projects is relatively good, we believe that the number of connected users of the company is expected to remain at 2.5-3 million households in the next 2-3 years.

Reasonable control of capital expenditure. 1H24 The company's capital expenditure was HK$2.36 billion, YoY -47.3%, mainly due to the company's drastic reduction in strategic capital expenditure (mainly used for mergers and acquisitions) investment. Looking ahead, we judge based on the current development of the urban gas industry. If there is no significant adjustment in the valuation of urban gas projects in the primary market, the capital expenditure scale of medium- to long-term companies may be gradually lowered to HK$4-5 billion per year, and the scale of capital expenditure may be lowered or lay the foundation for the company to further increase shareholder returns. Furthermore, under the current stock price, China Resources Gas 2024E dividend yield is about 5.3%, which we believe is already attractive to long-term investors.

Profit forecasting and valuation

The gross margin is improving. We raised 2024/2025 net profit by 6.1%/5.0% to HK$5.823 billion/ HK$6.504 billion. The current stock price corresponds to 2024/2025 10.5x/9.4x P/E. Maintaining an outperforming industry rating and a target price of HK$30.00, corresponding to the 2024/2025 11.9x/10.7x P/E, with 14.1% upside compared to the current stock price.

risks

LNG prices have risen sharply, and residents' smooth price progress has fallen short of expectations.