China Resources Gas's gas sales performance in January-October was good. The gross margin continued to improve and reached 0.45-0.55 yuan/square meter. The annual forecast is to achieve or even exceed the previous guideline of 0.5 yuan/square meter. It is expected that new residents will be connected throughout the year to complete the company's target of 3 to 3.5 million households, and we have adjusted our expectations to complete about 3.22 million households. The integrated services business continues to grow rapidly.
While China Resources Gas's overall industrial gas sales volume fell short of expectations this year, industrial and commercial gas sales volume maintained steady year-on-year growth. In the second half of the year and even in a single month, industrial gas sales achieved a low double-digit percentage year-on-year growth performance superior to that of peers. Furthermore, based on the optimization of the gas sales structure, gas supply to residents improved year on year, gas sales in commercial industries that support higher profits increased significantly year on year, and gross margin improved markedly. In addition, as an urban fuel enterprise with mergers and acquisitions in 2022, China Resources Gas provides the foundation for a steady increase in gas sales this year, which also reflects its superiority in financial elasticity, cash flow, merger and acquisition project capabilities, and project quality. The target price was adjusted to HK$34.13 to maintain the buying rating.
China Resources Gas's gas sales volume increased 10.7% year on year from January to October. The operating data for October was good. It is expected that China Resources Gas can achieve the annual gas sales target of an 8% year-on-year increase. In January-October, retail sales increased 7.6% year over year. Among them, residential sales volume maintained a steady growth of 11%, and industrial/commercial gas sales increased by more than 6.7%/8.3% year on year, thanks to the recovery in gas sales demand and the low base in the second half of 2022, as well as the increase in revenue volume brought about by mergers and acquisitions in 2022. Looking at the total retail sales volume in October 2023 alone, resident/industrial/commercial sales volume increased 12%/11%/18.5% year on year, and industrial and commercial sales volume continued to improve. For 2023, the annual guidance given by China Resources Gas's management is that retail gas volume growth will reach 8%. Based on October gas sales data and gradually improving gas demand, combined with the increase in winter gas consumption and the low base for the second half of 2022, we expect that China Resources Gas is expected to achieve its goals, and that the increase in commercial gas consumption ratio will lead to profit optimization.
The gross margin of China Resources gas continues to improve, and CNPC has signed a medium- to long-term gas source cooperation to ensure stable gas sources. The company's gross margin from January to October 2023 was 0.54-0.55 yuan/square meter (0.53-0.54 yuan/square meter in January-September), and 0.62 yuan/square meter in October (0.6 yuan/square meter in September). Thanks to the improved gas sales structure and the increase in the share of commercial gas sales and its active implementation of price adjustment measures, the gross margin continued to increase, and residents completed more than 60%. The company expects it to reach 70% in 2023. Although the increase in gas prices in winter may put pressure on the gross margin in the fourth quarter, demand is not expected to be strong in warm winters, and we believe that China Resources Gas can achieve the gross margin target of more than 0.5 yuan per cubic meter by actively implementing price adjustments in several regions and passing on costs to end users. Furthermore, in August, China Resources Gas secured long-term gas supply by establishing a strategic partnership with China National Petroleum Corporation. The signing includes providing 4 billion cubic meters of medium- to long-term stable natural gas resources for China Resources Gas. The contract period is 10 years.
It is expected that the target of connecting new residents to 3 to 3.5 million households throughout the year will be reached. The integrated services business continues to grow rapidly.
As newly developed real estate projects slow down, additional gas connections are expected to slow down. The company is confident of completing the previous guidelines for connecting 3 to 3.5 million new residents. We have lowered the 2023 resident connection forecast from 3.47 million households to a relatively conservative 3.22 million households. Furthermore, we forecast that China Resources Gas's integrated service business will maintain an annual revenue growth of more than 18%.
The target price was adjusted to HK$34.13, and the buying rating was reiterated. China Resources Gas is currently trading at a price-earnings ratio of 8 times FY24E, which is 1 standard deviation (10 times price-earnings ratio) of its 3-year average price-earnings ratio. We think the valuation is attractive. We lowered our forecast for connecting new residents in 2023 from 3.47 million households to 3.22 million households. The 2024 connection was lowered accordingly. FY23/FY24 earnings per share were slightly lowered to 2.67 yuan/3.19 yuan.
Therefore, we adjusted the target price to HK$34.13, and based on the FY24E rolling target price-earnings ratio to 11 times (close to the 3-year average PE). We are optimistic about China Resources Gas's steady gas sales growth, improved gross margin and rapidly growing comprehensive service business, as well as good financial flexibility and M&A progress. Maintain the buy rating.