Considering the slowdown in industrial gas volume growth, we lowered China Resources Gas's net profit from 24-26 by -5.2/-3.7/ -2.9% to HK$5.4/6.1/6.8 billion. With the improvement of the fair price mechanism and the increase in the contribution of integrated services and integrated energy businesses, we are optimistic that China Resources Gas's profitability will recover and free cash flow will increase in 24-26, and the increase in the dividend ratio is expected to exceed expectations. The company's 1H24 dividend is HK25 cents per share (yoy +67%), and the 23-year dividend ratio is 50%. Assuming a 24-26 dividend ratio of 54/57/ 60% (previous value 53/56/ 60%), the current stock price corresponds to a dividend rate of 4.4/5.3/ 6.1%. Maintain “buy-in.”

Lowering the 24-year gas volume growth forecast, the 24-26 gas sales CAGR is still expected to reach 16%. The company's industrial gas sales yoy is only +3.7%, lower than +5.3% of the overall yoy; the impact of declining demand in the real estate chain-related manufacturing industry continued, and the growth rate of outward sales contributed by mergers and acquisitions declined in 24. We adjusted the 24-26 gas sales yoy to +5.1/6.9/ 6.2% (previous value 6.5/6.9/ 6.2%). The smooth price continued to be implemented. In September/Zhengzhou, Hefei/Zhengzhou adjusted residential gas prices one after another. We maintained the 24-26 gross sales margin forecast of 0.54/0.56/0.58 yuan/square meter. With the double increase in gas sales volume and gross margin, we expect the profit CAGR of the company's gas sales business to reach 16% in 24-26.

The impact of connectivity on profits and valuations has weakened, and integrated services and integrated energy are expected to form a relay of 10M24, yoy -22.6% of the new domestic housing construction area. In the downward real estate cycle, the company is under pressure from new connections. We maintain the 24-26 new connection forecast of 2.9/2.6/2.3 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 (25/20/ 17%), and the impact of connectivity on profit and valuation will weaken. The company has high-quality customer resources, and the number of customers in third-tier cities at the end of June accounts for 73%. The integrated service and integrated energy business are expected to connect to the business; we expect the CAGR of comprehensive service operating profit to reach 18% in 24-26, and the comprehensive energy base and profit CAGR are expected to reach 50%.

The year-on-year reduction in strategic CAPEX, and steady dividends reflect the long-term value of the 1H24 company's capital expenditure YoY of -47.3% to HK$2.36 billion. As the number of corporate mergers and acquisitions projects decreases, we expect strategic capital expenditure to continue to decline in 2024. The company paid an interim dividend of HK25 cents per share (yoy +67%), benefiting from a year-on-year increase of HK$1.61 billion in free cash flow in 1H24. As the company's profitability gradually recovers and free cash flow continues to increase, we expect a potential dividend ratio of 4.4/5.3/ 6.1% for 24-26.

The profit forecast was slightly lowered. Based on the 25-year target valuation adjustment, the target price lowered the year-on-year growth rate of natural gas sales. We predicted that the company's net profit for 24-26 would be HK$5.4/6.1/6.8 billion (-5.2/-3.7/ -2.9%), with a year-on-year growth rate of 3.9%/12.4%/11.3%, and EPS of HK$2.35/2.64/2.93. Our target price for China Resources Gas is HK$31.68 (the previous value of HK$32.24 was based on 13x 2024E PE), based on 12x 2025E PE, which is equal to the five-year historical average.

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