The current situation of the company
The company's stock price has risen sharply from the bottom recently, and its attention in the capital market has gradually increased, but the company's valuation is still low and long-term attractive compared to comparable peers. The company's gas volume recorded a cumulative year-on-year growth of more than 35% from January to April, and we expect the industrial and commercial sector to grow by nearly 50% year-on-year. In April alone, we expect the monthly gas volume to grow by about 30% year-on-year, which is still the same as that of comparable peers.
We expect residents' new connection income to grow by more than 50% from January to April compared with the same period last year, mainly based on a low base in the same period last year, and we do not rule out the possibility that the company will increase its FY21 volume and new connection guidelines when it reports in mid-August.
Comment
We expect. The stake acquisition of Shanghai Gas will be launched this month, or in June at the latest. The first phase of management guidelines for cross-shareholdings between Hong Kong and China Gas and Shanghai Gas is expected to be launched in May or 6 this year. Shanghai Gas Company expects to make a profit of 850 million yuan in 2020, which is lower than that of Hong Kong and China Gas and other national leading gas companies, mainly due to the relatively large share of power generation and the room for improvement in cost. Management guidance. Shanghai's gas market still has room for further growth and is not a fully mature market. At the same time, in the restructuring of state-owned enterprises, cost reduction is expected to continue to bring future profit growth.
Construction of the Weiyuan shale gas project is expected to start in July. Through its subsidiary Weiyuan Ganghua in Weiyuan, Sichuan Province, the company led the establishment of Hedong Energy to obtain Sichuan shale gas resources through the LNG liquefaction plant, with a liquefaction capacity of 500000 square meters per day for the first stage and 1 million square meters per day for the second phase. We expect the project to have completed the safety assessment and environmental impact assessment, and will start construction in July this year, and will be put into operation around October next year.
The equity incentive scheme is expected to land in the short term. The company expects 2Q21 to launch equity incentives for management at the end of the day, buying back up to 5 per cent of its shares over the next five years for management incentives, rather than using stock options to avoid dilution to existing shareholders. Taking into account the different importance of management, we expect that the first-batch program is mainly aimed at core management and regional managers with less than 20 people, while the second and third batch of incentives are expected to include more middle-level core and technical personnel.
Valuation proposal
We kept our profit forecast unchanged and raised our target price by 22% to HK $5.50, taking into account the more optimistic volume growth and greater room for cost reduction guided by management. The target price corresponds to 10 times 2021 and 9 times 2022 earnings, with 12% upside compared to the current share price. The current share price corresponds to 9 times 2021 price-to-earnings ratio.
Risk.
The growth rate of gas volume is not as good as expected; the incentive plan is not as good as expected.