We lowered our 2024-26 net profit forecast by 6%/6%/3% to HK$1.45/1.53/1.7 billion. The growth rate of natural gas sales is being dragged down by industrial demand, but the net price and cost reduction help the gross margin continue to be repaired, and the company's urban gas business is expected to achieve moderate growth. Under the asset-light model, the company's industrial and commercial distributed photovoltaic equity installations may remain stable; the impact of changes in distributed photovoltaic policies is limited, and the profit and cash flow contributions of renewable energy are optimistic. The company has high dividend characteristics. If the dividend ratio remains at the same level as in 2023 (47%), we expect the company's dividend ratio in 2024-26 to be 6.3%/6.6%/7.4%. Maintain a “buy” rating.

Industrial demand dragged down the growth rate of natural gas sales, and the net price reduction helped the gross margin continue to repair. Considering that demand for industrial gas was under pressure and residential gas growth slowed after the decline in new connections, we lowered our 24-26 gas sales growth forecast to +6.6%/5.8% 5.2% (previous value +7.1%/7.2%/7.1%). The gross margin between distribution and power plants is low, but the proportion of gas volume has increased. We adjusted the gross margin forecast for 24-26 to RMB 0.51/0.52/0.53 (previous value 0.53/0.53/0.53 yuan/square meter); local residents continue to advance, and the company's procurement costs are declining. We expect the gross margin of urban gas sales to be RMB 0.57/0.59/0.61 yuan/square meter in 24-26.

Renewable energy is gradually moving towards an asset-light model. I am optimistic that the new business will contribute profits and cash flow. At the end of June 24, Hong Kong and China's industrial and commercial distributed photovoltaics connected to the grid reached 2.1 GW, and the renewable energy sector achieved a net profit of HK$0.164 billion in 1H24. Due to changes in the external environment, the company adopted a steady cash flow strategy to control the scale of new installed capacity and introduce external strategic shareholders to reduce its own capital expenses; we expect to add 0.5 GW of installed capacity every year from 24-26, reach 2.0/2.4/2.9 GW, and reduce the equity ratio by 78%/64%/55% year by year. The draft for comments on distributed photovoltaic management measures in October '24 changed the industrial and commercial distributed photovoltaic business model. The original surplus electricity feed-in volume was required to participate in market-based transactions. We reduced the net profit of renewable energy by 1%/9%/8% to HK$0.27/0.29/0.3 billion in 24-26; however, the company's high-quality photovoltaic assets and energy and carbon management are expected to contribute sufficient profit and cash flow.

The profit forecast was slightly lowered. Based on the 25-year valuation adjustment target price reduction in gas sales growth rate and renewable energy profit, we will reduce the net profit returned to mother (core) by 6%/3% to HK$1.45/1.53/1.7 billion in 2024-26, respectively. According to the Segment Valuation Act, the company was awarded 8xPE for the city gas business in 2025 (equal to the 5-year historical PE average) and 12xPE for the renewable energy business (17x lower than the comparable company average, taking into account the Hong Kong stock market discount). The core net profit was HK$1.24 billion and HK$290 million. The target market value is HK$13.4 billion, and the target price is HK$3.85 (previous value of HK$3.93, based on 8x/13x 2024E PE in the urban gas/renewable energy business).

Risk warning: The growth rate of gas demand has slowed; natural gas costs have risen sharply; electricity prices for industrial and commercial customers have declined.