2023 results fall short of market expectations
The company announced its 2023 results: revenue of HK$101.27 billion, +7% year over year; net profit to mother of HK$5.224 billion, corresponding to earnings of HK$2.26 per share, lower than market expectations, mainly due to 2H23's increased shareholding in multiple gas projects and amortization of HK$430 million year-on-year. If this effect is excluded, we estimate 2H23's profit +25% year-on-year.
In 2023, the company's natural gas sales volume was 38.78 billion square meters, with a gross retail gas margin of 0.51 yuan/square meter, +0.06 yuan/square meter; new users connected 3.31 million households; and comprehensive service revenue of HK$4.04 billion, +27% year over year. The company plans to pay a final dividend of HK100.69 HK cents/share. The annual dividend will reach 115.69 HK cents per share, +10% YoY, and a full year dividend rate of 50%.
Development trends
The 2024 defect repair situation may have exceeded management guidelines. The company's gas sales growth rate in 2023 (+8.1% YoY) and gross margin improvement (+0.06 yuan/square meter) are at the leading level in the same industry. We think the main reason is 1) the company added many new mergers and acquisitions in 2022 to 2023, which contributed to gas volume growth, 2) the overall smooth price progress of the company's residents. By the end of 2023, favorable price cities covered about 60% of the residential gas volume (vs about 50% of the same industry); looking ahead to 2024, the management guided the 2024 gas sales volume +6-8% year-on-year ratio, with a gross margin of 0.52 yuan/square meter. 1) Recently, gas projects in Chengdu/Fuzhou and other cities belonging to the company have obtained price adjustment documents; 2) LNG spot prices remain low (as of March 29, the JKM price was about 9.4 US dollars/mmBTU). We believe that the company's gross margin repair situation may have exceeded management guidelines.
Asset amortization does not affect cash flow, further slowing down the pace of mergers and acquisitions. Considering that asset amortization, which affects 2H23's performance, did not generate actual cash outflows, we believe that the company's operating cash flow is expected to remain at a high level in the next few years. Furthermore, based on the current profit situation in the urban gas industry, management indicates that the capital expenditure for mergers and acquisitions in 2024 may be reduced to about HK$1 billion (vs HK$2.7 billion in 2023). We believe that the decline in the scale of capital expenditure has also laid a good foundation for the company to further increase the amount of dividends.
Profit forecasting and valuation
Taking into account the increase in non-cash amortization and continuing to decline, we lowered our 2024 profit forecast by 24% to HK$5.5 billion, and introduced a profit forecast of HK$6.2 billion for 2025. The current stock price corresponds to 2024/2025 10.5x/9.3x P/E. Considering the company's abundant cash flow, dividends still have the potential to improve and maintain the industry rating. Due to the lower profit forecast, we lowered our target price by 22.9% to HK$27, corresponding to 11.4x/10.1x P/E in 2024/2025, with 8.2% upside compared to the current stock price.
risks
The smooth price progress fell short of expectations, and the real estate decline exceeded expectations.