2024H1's core net profit increased 21.2% year over year: in the first half of 2024, the company achieved turnover of HK$52.08 billion, up 7.7% year over year, with gas sales/connection fees/integrated services/design and construction revenue +11.0%/-29.1%/+20.3%/2.6%, respectively. The overall gross margin was 18.6%, an increase of 0.4 percentage points over the previous year, the first increase since 2020. Profit attributable to shareholders was HK$3.46 billion, a year-on-year decrease of 2.5%. Excluding the one-time revenue impact of Chongqing Gas's consolidated accounts for the same period of the year, the year-on-year increase was 21.2%. An interim dividend of HK25 cents per share was declared, representing a year-on-year increase of 66.7%.

Natural gas sales increased by 5.3%, and the gross margin was further fixed to 0.54 yuan/square meter: in the first half of the year, retail sales of natural gas reached 20.9 billion square meters, up 5.3% year on year. Among them, resident/industrial/commercial gas sales increased 7.0%/3.7%/8.1% year on year, respectively. During the period, the company enriched its natural gas resource pool and optimized gas source costs through measures such as establishing a natural gas trading company in Hong Kong, stabilizing the three major oil markets, and expanding other high-quality resources. The company's overall gross margin increased from 0.5 yuan/square meter in the same period in 2023 to 0.54 yuan/square meter. With the continuous optimization of upstream costs and the further development of favorable price policies, the company's gross sales margin is expected to continue to improve. In the first half of 2023, the company added 1.056 million connected users, a year-on-year decrease of 22.6%, and the cumulative number of users reached 58.33 million.

The integrated services and integrated energy business grew significantly: the company's integrated services business revenue increased 20.0% to HK$1.76 billion during the period, and segment profit increased 22.1% to HK$0.76 billion. The penetration rate of integrated services is still low, and it is expected that as the company continues to further promote it, it will maintain a relatively rapid pace of development. The integrated energy business achieved revenue of HK$0.83 billion in the first half of the year, up 38.0% year on year, and gross profit increased by 84.3% to HK$0.16 billion. Comprehensive Energy signed 27 new distributed photovoltaic projects and 28 distributed energy projects during the period, bringing the cumulative number of projects to 208 and 211, respectively. The company's comprehensive energy business relies on extensive customer resources in the business area, focuses on distributed energy, distributed photovoltaics and charging pile businesses, and lays out new business development directions such as “hydrogen,” “carbon,” “green,” and “storage”. It is expected that maintaining a relatively rapid growth rate will bring new profit growth points to the company.

Adjust the target price of HK$32.60 and maintain the purchase rating: As the smooth prices of local residents further develop, the company's gross margin level will rise steadily, which will strongly support the steady growth of the company's performance. The company's “dual integrated” business can also continue to grow at a relatively rapid pace. The company's free cash flow improved significantly to HK$1.9 billion during the period, thanks to a significant improvement in the company's gross margin and a reduction in capital expenditure of 47.3% to HK$2.36 billion. It is expected that the company's future capital expenditure will remain stable, providing a guarantee for the company's continued shareholder returns. We expect the company's revenue for 2024 to 2026 to be HK$105.9 billion/111.8 billion/HK$119 billion, and net profit to mother of approximately HK$5.7 billion/6.2 billion/HK$7.1 billion, respectively. The target price was HK$32.6, which is equivalent to 13 times PE in 2024, maintaining the buy rating.

Risk factors: Sales volume falls short of expectations, smooth price progress falls short of expectations, and new business development falls short of expectations.