Strong recovery, improved valuations, maintenance of “buying”
Ganghua Gas's gas sales in the first 4 months of 2021 increased 33% year over year, with industrial/commercial/residental/distributed energy system (DES) gas consumption increasing 44/31/10/80% year over year (May 27 shareholders' meeting).
We expect Ganghua Gas's gas sales to resume double-digit growth in 2021. The company's strategic cooperation with Shanghai Gas will enhance its competitiveness in upstream and value-added businesses. We expect Ganghua Gas's 2021-2023 EPS to be HK$0.55/0.62/0.70, raising the target price to HK$6.61 to maintain “buying”.
Gas sales may show double-digit growth in 2021
In 2020, Ganghua Gas's gas sales revenue fell 2% year over year to HK$10.6 billion, and gas sales increased 8% year over year to 12 billion cubic meters. Taking into account economic recovery and clean energy policies, we expect the company's gas sales to grow 15% in 2021, with industrial/commercial/resident/DES rising 15/15/10/50% year over year.
We expect an operating profit margin of 10.5% in 2021 (2020:10.0%), mainly due to the recovery in industrial and commercial sales prices and upstream breakthroughs. The company expects centralized procurement volume to be 700 million square meters in 2021, saving about 50 billion yuan in costs, equivalent to 0.07 yuan/square meter.
Shanghai Gas may help strengthen the company's upstream and value-added business
Ganghua Gas plans to spend RMB 4.7 billion to subscribe for 25% of Shanghai Gas's shares. The government approval process is currently underway, and the company expects the transaction to be completed within two months. In 2020, Shanghai Gas had a total of 6.4 million registered users, and gas sales/LNG imports reached 8.9 billion/6 billion cubic meters. Ganghua Gas expects both gas sales and profits of Shanghai Gas to achieve double-digit growth in 2021. The partnership will significantly enhance the company's market position for value-added business in East China and allow it to obtain Shanghai Gas's LNG import facility.
Optimistic about growth prospects, attractive valuations
As the company's gas sales volume growth prospects are positive, gross gas sales spreads are stable, and unit operating expenses are improving, we maintain our optimism and profit forecast for Ganghua Gas. Our target price is HK$6.61, which corresponds to 12 times the 2021 forecast PE (previous value: 5.51 Hong Kong dollars, corresponding to 10 times the 2021 forecast PE), which is slightly below 12.9 times its 5-year historical average, mainly taking into account future consolidation or some uncertainty.
The current stock price corresponds to 9.3 times the 2021 PE forecast (Huatai Forecast), which is significantly lower than its historical average. We think Ganghua Gas's current valuation is attractive.
Risk warning: 1) Domestic sales growth is slowing down; 2) Industrial user demand is weak.