The gross margin of gas sales improved significantly in the first half of the year, and core profit for the period exceeded expectations. The company's core profit for the first half of the year rose 21% to HK$3.46 billion, higher than our forecast of 8%. Among them, the retail gas segment contributed the most to profit growth. Retail gas volume increased 5.3% year-on-year during the period, and the gross margin of gas sales increased by 4 points to 0.54 yuan per cubic meter (RMB, same below), compared with our expectations of 0.50 yuan. At the same time, integrated services revenue/segment operating profit maintained a relatively rapid growth rate (+20%/+22% year over year), partially offsetting the impact of the 29% year-on-year decline in connection engineering division profit. The number of connections made by company residents during the period decreased by 0.3 million households to 1.34 million households over the same period last year. Additionally, sales and distribution/administrative expenses were 5-6% lower than our expectations, driving overall operating profit 22% higher than our expectations. Also, compared to March of this year, when the company only maintained a flat dividend ratio in 2023, the interim dividend increased 67% year over year to HK$0.25 per share, which was a surprise.
Profit forecasts for 2024-26 have increased significantly. We forecast a 5.3%/5.1% year-on-year increase in retail gas volume for the full year of 2024/25, with a gross margin of 0.53/0.54 yuan per cubic meter of gas sales, respectively. As for the connection project, we expect the company to add 2.8/2.4 million new connections in 2024/25 (down 17%/14% year on year). Management said that the current guidelines for about 2.8-2.9 million households are based on new orders signed in 2023, and 1.15 million new households were signed in the first half of this year. However, at the same time, the contract debt for the first half of the year was below HK$10 billion for the first time in recent years during the interim reporting period. We believe that expectations for new connections in 2025 still depend more on the volume of new contracts signed in the second half of the year. Due to the company's retail sales margin and operating rate control being better than expected, we raised our 2024-26 profit forecast by 13%/18%/19%, and the compound profit growth for 2023-26 was 9.8%.
High connectivity should limit valuation increases and maintain neutral ratings. As the company increases its interim dividend, and considering that the company only kept the dividend ratio flat in 2023, we expect the company still has the opportunity to slightly increase its dividend ratio by 2 percentage points to 52% in 2024. Regarding the valuation criteria, we are still relatively conservative in maintaining a price-earnings ratio of 10 times the 2025 forecast (9 times/10 times 2025 price-earnings ratio compared to the new Austria/Kunlun price-earnings ratio), and the target price was raised to HK$28.9. We believe that the market may still worry that the company's new connection volume forecast for the next two years is still nearly 1 million units higher than the company's 5-year historical average. Our valuation standard is still a 32% discount compared to the company's 5-year historical average to reflect the risk that the company's new connection base is high. Maintain a neutral rating.
