The net profit of CR Gas slipped 2% YoY to HK$3,457m in 1H24, 6% above our forecast. This discrepancy mainly came from the higher- than-expected dollar margin. We expect its earnings to drop 40% HoH in 2H24 as the company usually books much higher expenses in 2H of a year. We raise our 2024-26E earnings forecasts by 7-9% and reiterate our BUY call with target price increased to HK$35.41.
Key Factors for Rating
The company's dollar margin improved from RMB0.50/m3 in 1H23 to RMB0.54/m3 (vs our forecast of RMB0.50/m3) in 1H24 on improvement in gas procurement mix and low upstream gas cost. Its gas sales volume grew 6% YoY. However, all these were largely offset by 23% YoY decline in new connections to 1.03m HH (vs our forecast of 1.21m HH) in 1H24. Together with the increase effective tax rate from 18.5% in 1H23 to 24.6% in 1H24, the company ended up with a small earnings decline in 1H24.
The operating profit of its comprehensive services segment surged 22% YoY in 1H24 with its market share of kitchen appliances rose 0.3ppt YoY to 9.0%. The company continued to promote the "Gas Butler" model and implemented network management to cover 32.61m HH, about 55% of its residential clients.
The company has identified distributed solar, distributed energy and EV charging as the three key operations of its comprehensive energy business. In 1H24, the gross profit of this business surged 84% YoY to about HK$160m.
While the company raises its interim DPS by 67% YoY to HK$0.25, it is more to do with the reallocation of the split between interim and final DPS rather than signaling the increase in full-year payout.
We expect its earnings to be 40% lower HoH in 2H24 mainly because the company usually books much higher SG&A expenses in 2H of a year.
We raise our 2024-26 earnings forecasts by 7-9% in view of the better-than- expected earnings in 1H24. In particular, we raise our dollar margin forecasts from RMB0.52/m3 to RMB53-0.54/m3 and lower our HQ expenses forecasts. This outweighs the 1-3% cuts in our gas sales assumptions and the 3-7% cuts in our new connection forecasts.
Key Risks for Rating
Higher-than-expected costs.
Faster-than-expected fall in new connections.
Valuation
We increase our DCF valuation and hence target price from HK$31.16 to HK$35.41 given the increases in our earnings forecasts. This is equal to 14.5x 2024E P/E.
