Profit in 2020 is slightly lower than expected; maintain "buy"
On March 18, Hong Kong China Gas announced its 2020 results: revenue fell 1 per cent year-on-year to HK $12.8 billion and net profit rose 11 per cent year-on-year to HK $1.4 billion. The profit was slightly lower than we expected (HK $1.5 billion), in line with Bloomberg's consensus expectations. The main operating data for 2020 are as follows: 1) gas sales increased steadily by 8% to 12 billion cubic meters compared with the same period last year; 2) the company added 700000 customers, and the operating profit margin of the connecting business dropped slightly to 41.2% (2019: 42.8%). It is estimated that the company's EPS for 2021-2023 will be HK $0.55, HK $0.62, with a target price of HK $5.51, with a "buy" rating.
The growth rate of gas sales is expected to increase in 2021
China Gas's gas sales fell 2 per cent to HK $10.6 billion in 2020 from a year earlier, accounting for 83 per cent of total revenue.
Gas sales in 2020 increased by 8% year on year to 12 billion cubic meters, of which industrial / commercial / residential / DEP gas consumption increased by 12% / decreased by 14% / increased by 6% / increased by 238%. Taking into account the company's double-digit growth guidelines, we raised our 2021 gas sales growth forecast to 15% (previous value: 11%).
Due to the rebound in industrial and commercial gas prices and the breakthrough of upstream gas sources, we expect the operating profit margin to reach 10.5% in 2021 (2020: 10.0%).
In 2020, the revenue of the connecting business increased and the operating profit margin decreased.
In 2020, the revenue of the Hong Kong-China Gas connection business increased by 6% compared with the same period last year, and the operating profit margin of the division fell to 41.2% (2019: 42.8%). Benefiting from the growing demand in North China and strict environmental protection policies, the number of new connecting customers of Hong Kong and China Gas reached 700000 in 2020, of which 690000 were residents. We expect revenue from the Hong Kong-China Gas connection business to be flat in 2021.
Reach strategic cooperation with Shanghai Gas
Ganghua Gas plans to subscribe for a 25% stake in Shanghai Gas. The total number of customers of Shanghai Gas is 6.4 million, and its gas sales / LNG import in 2020 is 8.9 billion / 6 billion cubic meters. The company expects Shanghai gas profits to grow by at least 30 per cent year-on-year to 850 million yuan in 2020, and double-digit sales and profits are expected to grow in 2021. This cooperation will consolidate the position of Hong Kong-China Gas in East China and gain the right to use the LNG import facilities in Shanghai.
Optimistic about the growth space, the valuation is attractive.
Taking into account the growth of gas volume, stable profit margin on gas sales and improved operating expenses, we are optimistic about the growth space of the company.
We estimate that the return net profit for 2021-2022 will be HK $1.64 billion (previous value: HK $1.84 billion, with an increase in gas growth but a decline in the revenue base in 2020), with an additional forecast of HK $2.07 billion in 2023. We give the company a target price of HK $5.51 (previous value: HK $6.10) based on 10 times the 2021 forecast PE, which is 1 standard deviation below the historical average (12.9 times). At present, the share price of Hong Kong and China Gas corresponds to 6.9 times 2021 PE, which is significantly lower than its historical average, and we think the valuation is attractive.
Risk hints: 1) the growth of China Gas's gas sales slows down; 2) the gas demand of industrial users is weakening.