Key investment points

The largest urban gas operator in the country has a good cash flow matching capital expenditure and a steady increase in dividends. As of June 2024, the State Assets Administration Commission is the actual controller of the company and indirectly holds 61.47% of the shares. By the end of 2023, the number of registered urban gas projects at the group level had reached 276, spread across 25 provinces; in 2023, the company's retail natural gas sales volume was 38.78 billion square meters, accounting for about 10% of the country's consumption, making it the largest urban gas operator in the country. The company's operating cash flow/capital expenditure in 2023 was HK$10.157/7.89 billion respectively, achieving a good match between cash flow and capital expenditure, and driving the company's steady expansion. The company's dividend per share grew steadily from HK$0.45 in 2016 to HK$1.16 in 2023, a compound growth rate of 14.5%; the total amount of the company's cash dividend in 2023 was HK$2.68 billion, with a dividend ratio of 51.25%, creating steady growth returns for shareholders.

Gas sales business projects are of high quality, and price differences have been fixed and profitability improved under market-based reforms. The high quality of the project promoted a steady increase in gas consumption. The compound growth rate of the company's retail gas volume in 2018-2023 was 9.8%. In 2023, the company's retail gas volume for individual urban fuel ranked first among the top five, and the gas consumption of a single project showed a trend of increasing year by year. The project was of high quality; about 60% of the company's residential users were distributed in regions with high economic levels, such as first-tier and second-tier cities, and 42% of the projects were distributed in the top ten provinces and municipalities in GDP, driving a steady increase in gas volume. The compound growth rate of the company's retail gas volume was 9.8% in 2018-2023, and the 2024H1 retail gas volume increased 5.3% year on year. In 2023, the company's gross margin was repaired at 0.06 yuan/square meter to 0.50 yuan/square, and 2024H1 was further repaired to 0.54 yuan/square meter, an increase of 0.04 yuan/square meter over the previous year. Further correction of gross margin is expected under market-based reforms. In February 2023, the National Development and Reform Commission issued a “Letter on the Status of Providing an Upstream and Downstream Price Linkage Mechanism for Natural Gas”. In 2023, the company made every effort to promote terminal price guidance. The gross sales margin for the whole year was raised from 0.45 yuan/square meter in 2022 to 0.51 yuan/square meter in 2023, an increase of 0.06 yuan/square meter. The 2024H1 was further repaired to 0.54 yuan/square meter, an increase of 0.04 yuan/square meter over the previous year, and the net price effect was obvious. We sorted out the gas price policies for cities above prefectural level across the country. From 2022 to 2024M9, 56% of prefecture-level cities and above across the country had favorable prices for residents, with a price increase of 0.21 yuan/square meter. With the gradual implementation of smooth prices, the company's smooth price flexibility will continue to show.

Expand integrated services and integrated energy businesses to create new growth points. Comprehensive services are growing rapidly, creating a “hundred cities and ten thousand stores” model. The business mainly provides end users with kitchen appliances, heating, insurance agents, and housing products.

By the end of 2023, the company had 55.808 million urban users, including 40.684 million users in third-tier cities and above, accounting for 73%, laying a good user base for comprehensive services. In 2023, the profit of the integrated services segment increased by 18.99% from HK$1.15 billion to HK$1.37 billion, and the 2024H1 segment's profit increased 22.12% year over year to HK$0.76 billion, further accelerating; the market share of existing users in the kitchen electric heating and insurance business was 8.6% and 23.0% respectively, and the average household income of the residential housing business in 2023 increased from $102.2 in 2022 to $107.2, which is expected to increase penetration rate and business volume. Focus on the “two blocks and one charge” integrated energy circuit to explore the energy needs of industrial and commercial users. The company selected distributed photovoltaics, distributed energy and transportation charging development tracks on merit, focusing on high-quality energy use scenarios for parks, public construction and transportation. In 2023, the company's energy sales increased 84.9% year on year to 2.94 billion kilowatt-hours, achieving gross profit of HK$0.27 billion, up 125% year on year; 2024H1 energy sales increased 54.6% year over year to 1.49 billion kilowatt-hours, achieving gross profit of HK$0.16 billion, up 84.3% year on year, maintaining a relatively fast growth rate.

Profit forecasting and investment rating: High quality urban gas projects, smooth price promotion of profit recovery, leading the industry in double integrated business growth rate. We expect the company's net profit to be HK$5.722/6.271/6.788 billion in 2024-2026, or +9.5%/+8.2% year-on-year, corresponding to 11.5/10.5/9.7 times the previous PE (valuation date 2024/11/14).

First coverage, giving a “buy” rating.

Risk warning: real estate cycle, economic growth rate falling short of expectations, extreme weather & changes in the international situation, safety business risks