occurrences

The company published its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of HK$52.08 billion, up 7.7% year on year; profit attributable to shareholders was HK$3.46 billion, a decrease of 2.5% year over year. Excluding the impact of exchange rate fluctuations, shareholders' profit increased 0.3% year on year; excluding Chongqing Gas's consolidated income for the same period in 2023, shareholders' profit increased 21.2% year over year.

Both retail gas volume and gross margin achieved positive growth. The company's basic business performance was steady in terms of retail gas volume. In the first half of 2024, the company's retail gas volume increased 5.3% year-on-year to 20.9 billion cubic meters. Among them, industrial gas sales increased 3.7% year on year to 9.66 billion cubic meters; commercial gas sales increased 8.1% year on year to 5.01 billion cubic meters; and consumer gas sales increased 7% year on year to 5.76 billion cubic meters.

The company's upstream resource acquisition capacity is gradually improving, and gas source costs are gradually being optimized. The company's self-managed gas volume reached 1.75 billion square meters in the first half of the year, an increase of 30% over the previous year, and is expected to save 0.03 billion yuan in costs. At the same time, the annual contract target volume was increased by 0.75 billion square meters. The average cost of the company's gas sales in the first half of the year was 2.94 yuan/square meter, down 0.14 yuan/square meter from the same period last year. The decline in procurement costs contributed to the continuous improvement of the gross margin in the gas sales business. In the first half of the year, the company's gross sales margin was about 0.54 yuan/square meter, an increase of 0.04 yuan/square meter over the previous year.

The increase in gas volume combined with the improvement in gross sales margin. In the first half of the year, the company's gas sales business revenue accounted for 90.2% of turnover, an increase of 2.7 pct over the previous year; the profit from the gas sales business reached 4.75 billion Hong Kong dollars, a sharp increase of 31.3% over the previous year, which is beneficial to support the steady growth of the company's operating performance.

In terms of user development, 0.025 million industrial and commercial users and 1.031 million new residential users were developed in the first half of the year. Meanwhile, as of the end of the first half of the year, the average gasification rate of urban gas projects operated by the company increased from 58.4% at the end of 2023 to 59.6%.

Comprehensive energy and integrated services continue to grow rapidly

Comprehensive service business: The company's comprehensive service business includes kitchen appliances, heating, insurance agency, and housing services. In the first half of the year, revenue of HK$1.77 billion increased 20% year over year; segment profit of HK$0.76 billion increased by 22.1% year over year. Excluding the effects of exchange rate fluctuations, the growth rates of comprehensive service revenue and segment profit reached 23.5% and 25.7%, respectively.

Comprehensive energy business: In the first half of the year, the company signed 27 new distributed photovoltaic projects, 18 new projects were put into operation, and 208 were developed; 28 new distributed energy projects were signed, 31 were newly developed, and energy sales volume was 1.49 billion kilowatt-hours, an increase of 54.6% year on year, achieving comprehensive energy business revenue of HK$0.83 billion, up 38% year on year, and gross profit of HK$0.16 billion, up 84.3% year on year.

Free cash flow has improved dramatically, increasing the dividend payout ratio in the medium term

The company's capital expenditure in the first half of the year was HK$2.36 billion, a year-on-year decrease of 47.3%; free cash flow was HK$1.9 billion, a significant increase of 562.3% over the previous year. In terms of dividends, the company plans to pay a dividend of 25 HK cents per share in the medium term, a significant increase of 66.7% over the previous year.

Profit forecast and valuation: The gradual return of the market to normal in 2024, the gradual recovery of downstream natural gas demand, and the continued promotion of the favorable price policy will have a positive impact on the company's gross sales margin, but the market is still in a fragile balance and faces many uncertainties. We expect the company's net profit to be HK$5.73, 6.37, and 7.15 billion in 2024-2026, respectively, and the corresponding PE is 11.4, 10.3, and 9.2 times, respectively, maintaining a “buy” rating.

Risk warning: macroeconomic downside risks; upstream gas prices rise above expectations; downstream surplus prices fall short of expectations; international gas prices fluctuate beyond expectations; the expansion of the company's comprehensive energy and integrated services business falls short of expectations; the policy side has exceeded expectations for the natural gas industry, etc.