After deducting 1H24 net profit yoy +21.2%, slightly adjusted profit forecast and target price, China Resources Gas released an interim report. 1H24 achieved revenue of HK$52.1 billion (yoy +7.7%) and net profit to mother of HK$3.457 (yoy -2.5%); after excluding the impact of one-time revenue, net profit to mother yoy +21.2%, mainly due to the increase in sales and comprehensive services profit. Refer to the changes in 1H24 core business data, raise the gross margin forecast, and lower the new connection forecast. We expect net profit to mother of HK$5.7/6.3/7 billion for 24-26 (previous value: HK$5.8/6.3/6.9 billion). The target price is HK$32.24, corresponding to 13x 2024E PE (previous value: HK$32.37), which is equal to the five-year historical average (13 times). We are optimistic about China Resources Gas's 24-26 profitability recovery. The company plans to pay an interim dividend of HK25 cents (yoy +67%) per share, with a dividend ratio of 50% for 23, assuming a dividend ratio of 53%/56%/60% for 24-26, benefiting from continued growth in free cash flow, corresponding to a dividend rate of 5.0/5.9/ 6.9%. Maintain “buy-in.”

Gas volume growth is slightly lower than the industry average, and the gross margin of residents is expected to continue to repair 1H24's gas sales volume by +5.3% to 20.9 billion square meters, lower than the national apparent growth rate (+10.1%); among them, industry +3.7% /commerce +8.1% /residents +7.0%. The industrial growth rate is lower than the overall performance, affected by the decline in manufacturing demand related to the real estate chain. As the number of mergers and acquisitions of the company decreases, the growth rate of epitaxial sales volume may decline. We lowered the 24-26 year-on-year sales growth rate to 6.5/6.9/ 6.2% (previous value 7.6/7.0/ 6.3%).

The gross sales margin of the 1H24 company was yoy+4 cents/square meter to 0.54 yuan/square meter. Among them, residential gas prices increased by 8 points/square meter, and the average cost decreased by 0.14 yuan/square meter year on year. The net price continues to be implemented, and the gross margin among residents is expected to continue to be fixed. We raised the gross sales margin to 0.54/0.56/0.58 yuan/square in 24-26 (previous value: 0.52/0.54/0.55 yuan/square). Thanks to the double benefit of volume and price, 1H24's gas sales business profit yoy +31.3% reached HK$4.75 billion.

The share of connection profits has dropped sharply, and integrated services are expected to form a relay for 1H24 to add -23% connections to 1.031 million households, including new yoy -22% and old YOY -31%. We reduced the number of new connections to 2.9/2.6/2.3 million households in 24-26 (previous value 3/2.7/2.4 million households). 1H24's gas connection operating profit accounts for yoy-10pp to 17%. We expect it to decline year by year from 24-26 (24/20/ 16%), and the impact of connectivity on profit and valuation will weaken. The company has excellent customer resources, and the number of customers in third-tier cities at the end of June accounted for 73%. The comprehensive service business is expected to relay to the connection business; 1H24 integrated service operating profit yoy +22%, and we expect the CAGR of comprehensive service operating profit to reach 18% in 24-26.

The year-on-year reduction in strategic CAPEX, and steady dividends reflect the long-term value of the 1H24 company's capital expenditure yoy -47.3% to HK$2.36 billion, of which the strategic expenditure decreased by HK$2.48 billion year on year; as the number of corporate mergers and acquisitions projects decreases, we expect strategic capital expenditure to continue to decline in 2024. The company plans to pay an interim dividend of HK25 cents per share (yoy +67%), thanks to a year-on-year increase in free cash flow of HK$1.61 billion in 1H24. As the company's profitability gradually recovers and free cash flow continues to increase, we expect a potential dividend ratio of 5.0/5.9/ 6.9% for 24-26.

Risk warning: The recovery in gas demand fell short of expectations, and there is uncertainty in the global gas market.