The company's recent situation

Ganghua Gas announced that the first part of its 25% cross-shareholding deal with Shanghai Gas was completed on July 9. After the transaction is completed, Ganghua Gas directly holds 25% of Shanghai Gas's shares, and the corresponding investment income is included in accordance with the equity law. Judging from the delivery time, it is basically in line with the mid-year completion timeline previously given to the market by management. We expect that the second part of this transaction, namely the transaction where Ganghua Gas will issue 25% more new shares to Shanghai Gas, is expected to complete delivery within the next year. We expect the company's 1H21 gas volume to increase close to 30% year over year, which is still at a high level compared to peers, and we also expect the interim report to exceed expectations under the premise of a lower base and exchange rate changes (depreciation of the Hong Kong dollar against the renminbi). The attention paid to the company's stock price in the capital market is gradually increasing, but compared to peers, we expect that the company's valuation is still low and that it is more likely to be attractive in the long term.

reviews

Shanghai Gas's equity acquisition brought new impetus to growth. We expect the equity acquisition of Shanghai Gas to bring Ganghua Gas a 67%/72% increase in net profit in FY21/22 (FY21 calculated based on the real contribution over 6 months). According to management, the gas market in Shanghai is not fully mature, and there is still potential for further growth, such as natural gas power generation and heating projects. At the same time, we believe that in terms of the restructuring of state-owned enterprises, cost reductions are expected to continue to bring about future profit growth.

Construction of the Weiyuan shale gas project is expected to begin in the second half of this year. The company took the lead in establishing Hezong Energy through its subsidiary Weiyuan Ganghua in Weiyuan, Sichuan, to obtain resources from Sichuan shale gas through an LNG liquefaction plant. The liquefaction capacity of the first phase was about 500,000 m3/day, and the liquefaction capacity of the second phase was about 1 million m3/day. Considering that Ganghua Gas will quickly access upstream resources through an LNG liquefaction plant, we expect the Weiyuan shale gas project to have completed the safety and EIA assessment, commence construction in the second half of this year, and put into operation in the second half of next year.

The equity incentive plan is expected to be implemented in the short term. The company expects to introduce equity incentives for management at the end of 2Q21. Up to 5% of the shares will be repurchased within the next 5 years for management incentives, rather than using stock options to avoid dilution of existing shareholders. Considering the differences in the importance of management, we anticipate that the first batch of plans will mainly target core management and regional managers, etc., while the second and third batch of incentives are expected to include more middle level core cadres and technicians.

Valuation and advice

We keep our profit forecast and target price of HK$6.2 unchanged. Corresponding to price-earnings ratios of 11 times FY21 and 10 times FY22, there is 12% upside from the current stock price. Maintain an outperforming industry rating. The current stock price corresponds to a price-earnings ratio of 10 times FY21 and 9 times FY22.

risks

The growth rate of gas volume was less than expected in gross gas sales; the incentive plan fell short of expectations.