1H23 performance is basically in line with our expectations

The company announced 1H23 results: revenue of HK$48.36 billion, +5.1% year on year; net profit to parent of HK$4.65 billion, year-on-year, corresponding to profit of $3.69 billion per share, which is basically in line with our expectations; after excluding one-time matters, core profit of HK$3.92 billion, compared to -24.6%. The company said that the decline in core profit was mainly due to the depreciation of RMB, interest rate increases, and the impact of falling Chinese gas profits. Excluding related effects, the company's profit was basically the same year on year. The company plans to pay an interim dividend of 0.93 HKD/share, +0.43 HKD/share, corresponding to a core profit payout ratio of 30%. The interim dividend amount exceeds our expectations.

1H23 Beijing Gas achieved natural gas sales volume of 12.09 billion square meters, +11.1% year on year, of which gas sales volume in Beijing was 9.23 billion square meters, or -1.3% year on year.

In terms of joint ventures and joint ventures, 1H23 confirmed that the investment income of Beijing Pipeline/Beikong Water/VCNG/China Gas was HK$13.6/6.4/74/230 million, +11.9%/+126.8%/-19.7%/-71.5% over the same period last year.

Development trends

2H23 The company's operating performance is expected to improve. Looking ahead to 2H23, we expect the company's overall business performance to improve. The main reason is 1) benefiting from an increase in the price ratio, China's gas profitability is expected to recover sequentially, 2) benefiting from the resumption of growth in China's natural gas consumption, and there is still room for improvement in Beijing Pipeline 2H23's profit; 3) Within 23 years, the company has issued 2 low-interest medium-term notes totaling 7 billion yuan in China (with a coupon interest rate of less than 3%), which is expected to save some financial expenses.

Beijing's gas dividend potential may be gradually unleashed, and there is still room for repair in the company's valuation. Looking ahead, considering that the first phase of the Beiran Nangang LNG project has already been completed, we believe that the scale of Beijing's gas capital expenditure may enter a downward cycle, and dividend capacity is expected to be further enhanced, laying a good foundation for the company to fulfill the 35% core profit payout ratio guideline for 2025. Based on the company's business model that favors utilities, we expect that some investors may use the DDM model to value the company. That is, as the company's dividend rate increases, the company's valuation is also expected to recover simultaneously.

Profit forecasting and valuation

Taking into account the decline in oil prices, we lowered our 2023/2024 net profit by 5.9%/7.1% to HK$8.51 billion/9.42 billion. The current stock price corresponds to 2023/2024 4.4x/3.9 x P/E. Maintaining an outperforming industry rating and a target price of HK$40.00, corresponding to 5.9x/5.4x P/E in 2023/2024, there is 36.1% upside from the current stock price.

risks

Oil prices fluctuated greatly, and returns from the Nangang project fell short of expectations.