Key investment points

The profits of urban gas taps across the country are expected to bottom out and rebound. The company was founded in 2002 and listed on the Hong Kong stock market in the same year. Since 2008, it has gradually developed liquefied petroleum gas and value-added service businesses and transformed into a comprehensive energy supply service provider. In the 2023/24 fiscal year, the company's urban pipeline network sold 23.5 billion square meters of gas, accounting for 5.9% of the country's consumption, and the leading position is stable. The company's net profit for the 2023/24 fiscal year was HK$3.185 billion, -25.82% year-on-year, mainly due to the decline in connectivity business volume due to the real estate cycle. Profits are expected to rebound to the bottom as various regions drive natural gas smooth price policies and the company explores endogenous growth in connection business in 2023.

The company has good cash flow, a net present ratio of 2.94 for the 2023/24 fiscal year, a dividend payment ratio of 85.3%, and a dividend ratio of 7.74% (2024/11/20), with a margin of safety.

Urban fuel price differences have been fixed, and the connection business has switched to endogenous expansion. 1) Natural gas price policies were implemented in many places, and the company's gross margin rebounded 0.08 yuan/square year on year in 2023/2024; it actively signed long-term agreements with low LNG prices and low fluctuation to enhance cost advantages. Starting in 2023, China will step up efforts to promote the implementation of the resident-side upstream and downstream linkage mechanism, and the linkage mechanism has been improved. In February 2023, the National Development and Reform Commission issued a “Letter on the Status of Providing Upstream and Downstream Price Linkage Mechanisms for Natural Gas”. By the end of September 2024, 163 prefecture-level cities and above had adjusted prices across the country, accounting for 56%; the average increase was about 0.21 yuan/square meter. On 2023/24, the company's gross margin reached 0.50 yuan/square, an increase of 0.08 yuan/square meter, and profitability was restored. The company actively signed a long-term agreement for low LNG prices and low volatility. In the 2022/23 fiscal year, the company's subsidiary signed an LNG long-term agreement with three US LNG exporters with a total purchase volume of about 3.7 million tons/year to ease the upward pressure on costs brought about by a single domestic gas source and enhance cost advantages. 2) Actively expand the connectivity business, and the stock customer penetration rate for the 2023/24 fiscal year increased to 71%. As the growth of the connectivity business slows down, the company is actively developing the penetration rate of existing customers. In the 2023/24 fiscal year, the cumulative number of urban users reached 54.4 million, and the penetration rate of urban users rose to 71%, leading to endogenous growth.

Discover value-added business and integrated energy services to create the company's second growth pole. 1) Comprehensive layout of value-added business, “Yipinhui” plans to split the listing, and the brand effect will transform economic value. The value-added service business is divided into two modules: traditional urban fuel and Yipinhui. The company actively exploits grid advantages and uses the original user base to innovatively integrate online services and offline resources. “Yipinhui” uses an extraterritorial expansion model for export. Currently, it has signed contracts with more than 50 extraterritorial gas customers to develop collaboratively with the main urban combustion industry. 2) Implement the green city operator strategy and provide intelligent integrated energy services. The company invests in the construction of high-quality industrial and commercial rooftop distributed photovoltaics, and actively seeks business partners to promote EPC+ operation and maintenance services; cooperates to establish a zero-carbon environmental energy research institute to integrate leading resources and utilize the advantages of the entire industry chain to build a dual-carbon strategic demonstration base for the government to provide enterprises with comprehensive carbon management system construction services; strengthen the green transportation business layout to increase profit contributions; and actively develop electricity sales business to explore new models of power operation and maintenance. As of the end of the 2023/24 fiscal year, comprehensive energy efficiency has contracted a total installed capacity of 221.6 MWh. Among them, the industrial and commercial user side energy storage completed 112.7 MWh.

Profit forecasting and investment rating: The company's urban combustion project raised prices smoothly and price differences increased; actively lays out foreign long-term cooperation resources to obtain cost advantages. We expect FY2025-FY2027's net profit to mother of HK$4.017/4.464/4.914 billion, 26%/11%/10% YoY, or 8.7/7.9/7.1 times PE (2024/11/21). First coverage, giving a “buy” rating.

Risk warning: safe operation risks, natural gas demand recovery falling short of expectations, exchange rate fluctuations