Kunlun's earnings grew 3% YoY to RMB3,305m in 1H24, 8% above our forecast. The discrepancy mainly came from the better-than-expected earnings of the LPG sales and LNG processing and terminal segments. We expect the company to see flat earnings in 2H24 on a HoH basis. We raise our 2024-26 earnings forecasts by 5-11% after post-results adjustments. We reiterate our BUY call with target price increased to HK$10.55.

Key Factors for Rating

In 1H24, the operating profit of its LPG sales business surged 33% YoY to RMB563m as unit profit improved RMB48/tonne YoY on optimisation of procurement and increase in share of retail sales. That of the LNG processing and terminal segment grew 23% YoY to RMB1,640m on improved utilisation. In which, its LNG processing plants reported an operating profit of RMB35m, recovering from an operating loss of RMB55m in 1H23 as processing volume surged 62% YoY. Their profits were 125% and 24% higher than our forecasts.

While the company's retail gas sales grew 10% YoY, the operating profit of its natural gas sales segment only edged up 3% YoY to RMB4,545m. The dollar margin of retail gas dropped from RMB0.495/m3 in 1H23 to RMB0.45/m3 in 1H24 as the company transferred 568 gas refilling stations to its parent for the latter to convert them into integrated service centres for the refilling of gas, oil, power and even hydrogen. As a result, its CNG/LNG sales volume dropped 35% YoY. The auto gas is a higher margin business and the decline of this sales volume alone resulted in RMB0.038/m3 YoY drop in dollar margin. In return, the company got rental income and higher wholesale gas volume.

Looking ahead, we expect the company to see flat earnings in 2H24 on a HoH basis. The higher volume of retail gas sales and LNG terminal should compensate for the lower volume of LPG sales and LNG processing.

We expect the company to see steady growth ahead with its LNG terminals providing stable earnings and cashflow and natural gas sales and LPG sales as the growth drivers.

Key Risks for Rating

Lower-than-expected dollar margin of the natural gas sales business.

Higher-than-expected costs.

Valuation

We increase our DCF valuation and hence target price from HK$9.67 to HK$10.55 to reflect the increases in our earnings forecasts. Our new target price is equal to 12.5x 2024E P/E.

Declare First Ever Interim Dividend and Rising Payout RatioKunlun declares an interim DPS of RMB0.1641 for 1H24. It is the company's first ever interim dividend since its listing. The payout ratio is 43%, higher than 40% for 2023. Hence, the company is delivering on its promise of increasing payout ratio gradually to 45% by 2025 and paying dividend twice a year instead of once. This make it a good yield play together with its strong balance sheet and low reliance on connection fee.

Changes in Earnings Forecasts

We increase our 2024-26 earnings forecasts by 5-11% after updating our model based on the results. We assume the improved unit profit of its LPG sales business to stay and the sales volume of LPG to increase from 5.5m tonnes to 6m tonnes from 2025 onwards as the storage at Qingdao Dongjiakou Terminal will be completed late this year. We also raise our earnings forecasts of the natural gas sales segment slightly after working through the net impact of lower dollar margin for retail gas sales but higher wholesales gas volume and higher other income (like rental).