Core profit for FY20 increased 10% year-on-year, benefiting from a strong recovery in the mainland's new energy and gas sales business in the second half of '20

The company indicates that gas sales in the Mainland will increase by about 15% in FY21; it will focus more on future environmental protection strategies and investment directions

The cash dividend remained at HK$0.35 per share (96% payout rate), with a dividend rate of 5%; the current valuation of the stock price is 28.8 times the predicted price-earnings ratio for FY21, and the dividend yield is 3%, and the core profit for FY20 is slightly higher than market expectations

The net profit of Hong Kong and China Gas in FY20 fell 14% to HK$6 billion, but after adjusting asset provisions and net investment profit and loss, its core profit increased 10% year-on-year to HK$6.5 billion, slightly higher than market expectations. Overall revenue was almost flat, benefiting from improved performance in the renewable energy business (+28% year on year), which offset the decline in gas sales business in the Mainland (-1% year on year), while Hong Kong's gas sales business revenue fell 3% year on year. The overall EBITDA profit margin rose slightly to 29.2 percentage points in FY20 (28.3 percentage points in FY19) due to 1) the full-year benefit from the increase in gas prices in the Hong Kong business; 2) the increase in gas sales margin in the Mainland in FY20 (i.e. 0.59 yuan/cubic meter, compared to 0.58 yuan/cubic meter in FY19).

Optimistic prospects for the gas sales business in the Mainland

Management indicated that the sales volume of its mainland business in FY21 will increase by 13% to 15% year-on-year, as evidenced by a strong recovery in gas sales in the first two months of this year (the overall year-on-year increase was about 30%). Management is also optimistic about the gas sales gap, pointing out that in FY21 it will rise 0.01 yuan/cubic meter to 0.6 yuan/cubic meter, benefiting from an increase in liquefied natural gas purchases in FY21 (that is, 1.5 billion cubic meters, equivalent to 5.5% of its gas sales volume in FY20). Additionally, the company's investments in several liquefied natural gas terminals and shale gas liquefaction projects will further benefit overall gas procurement costs in the medium to long term. Furthermore, management expects the acquisition of Shanghai Gas to be completed in the second quarter of 2021.

Focus on environmental protection projects to promote future growth

Management has developed long-term development plans for businesses other than its core gas sales business: such as extended business (such as gas equipment, insurance, and lifestyle), smart energy (such as rooftop photovoltaics), and new energy business (such as biomass energy utilization), with a view to seizing potential opportunities for carbon neutrality in China, while aiming to achieve the listing of the smart energy segment by 2023.

Optimistic about the recovery trend of the industry

The company's strong performance and positive guidance in the second half of 2020 once again confirmed the industry's recovery momentum and growth trend. We expect the upcoming results of Xinao Energy and Kunlun Energy to bring positive news. We remain optimistic about the industry and maintain the buying ratings of the following companies: Xinao Energy (2688 HK, target price: HK$140), Kunlun Energy (135 HK, target price: HK$9.4), and China Gas (384HK, target price: HK$36).