Recently, the stock price has been boosted by the increase in market recognition of the good risk and return of Hongkong and China Gas.
Gas sales will grow steadily by 16% in 2021, while the LNG receiving terminal project ensures flexibility in long-term procurement costs.
The valuation attracts 8.3 times the forecast price-to-earnings ratio for FY21, maintains the buy rating, and raises the discounted cash flow target price from HK $5.2 to HK $6.0
The prospect of stable growth remains unchanged.
Since we first covered Hong Kong China Gas on April 22, the company's share price has risen 30 per cent as investors become increasingly interested in value stocks that attract valuations and the business continues to grow. The company's shares are currently valued at 8.3 times forecast earnings for fiscal year 21 (industry average: 14.0 times). We reiterate our optimistic view on the company's gas sales business, which has strong sales growth in fiscal 21, while industrial users will continue to be the main driver of future revenue growth (total sales account for more than 60%). As a result, we expect the company's overall sales volume to grow by 16%, 14% in fiscal year-on-year, driving revenue growth of 20% in fiscal year-on-year.
Long-term procurement cost advantage
Through the acquisition, the company has formed a close relationship with Shanghai Gas, which will strengthen the gas supply support of the two LNG receiving stations of Shanghai Gas to the area near Hong Kong and China Gas. In addition, parent company Hong Kong And China Gas (3 HK, target price: HK $12.2) is involved in a number of LNG receiving terminals and liquefaction projects, which will help to diversify the gas supply, provide greater procurement flexibility and bring longer-term cost advantages. Overall, we expect the company's gross margin in fiscal year 21 to remain stable at 0.57 yuan / cubic meter.
Maintain the buy rating and raise the target price to HK $6.0
Due to a slight increase in the sales forecast, we fine-tuned our core profit forecast for fiscal year 21-23 by 1-2%. The target price of the discounted cash flow method will be raised to HK $6.0 (previous: HK $5.2), corresponding to 9.8 times forecast price-to-earnings ratio for fiscal year 21 and 0.8 times forecast price-to-book ratio for fiscal year 21. We believe that the company's valuation is still attractive and its fundamentals are solid, with a compound annual growth rate of 12.3% and a dividend yield of 3.9% in fiscal year 21-23, and we expect the company's stock valuation to continue to be revalued, similar to our view of Kunlun Energy (135 HK, buy, target price: HK $12.0) in 2020.
We expect the company's equity acquisition of Shanghai Gas to be completed in the first half of 21, when management will provide more details on the business integration between the two sides.