20180624-招商证券_香港_-中国燃气-00384.HK-Stellar_FY18_results_and_promising_outlook_9页_1mb_1mb

China Gas (384 HK) Summary

Core Content

China Gas (384 HK) delivered strong FY18 results with a 42% YoY increase in recurrent profit, reaching HK$6.4bn, which exceeded both the analyst and market consensus. The performance was driven by better-than-expected gas sales, rural connection rollouts, and value-added services (VAS). The company also proposed a final DPS of HK$0.27, resulting in a full-year DPS of HK$0.35, a 40% YoY increase.

Main Points

• Gas Sales Growth:

  • FY18 gas sales volume increased by 52% YoY, outperforming the 24% YoY growth in FY17.
  • City & township gas sales grew by 39% YoY, while wholesale gas sales surged by 83% YoY.
  • Management maintains a >25% YoY growth guidance for city gas sales in FY19-21, the highest among peers.

• Connection Rollouts:

  • New connection rollouts increased by 53% YoY to 3.9mn households in FY18.
  • Rural connections reached 1.1mn households, contributing to the 4.3mn signed contracts as of 15 June 2018.
  • Management revised up its connection rollout guidance to 4.7mn in FY19, 5.5mn in FY20, and 6.3mn in FY21.

• Profit Adjustments:

  • The company shifted JCE/associates' profits to the group level starting from FY18, which impacted the gross margin of the connection fee business.
  • This shift reduced the overall connection fee gross margin from 73.5% in FY17 to 47.4% in FY18, but is expected to enhance long-term performance.

• Share Option Grant:

  • On 22 June 2018, the company proposed to grant 497mn shares to management and employees, representing 10% of issued share capital.
  • The share options are performance-linked, with recurring net profit targets of HK$12bn in FY22 and HK$13bn in FY23.
  • While this may dilute earnings by ~9%, it is intended to boost long-term value creation.

• Financial Performance:

  • Recurrent EPS rose from HK$0.91 in FY17 to HK$1.25 in FY18, with a 42.2% increase in FY18.
  • The core P/E ratio decreased from 35.8x in FY17 to 26.0x in FY18, and is expected to continue declining in the coming years.
  • The P/B ratio also dropped from 9.1x in FY17 to 7.8x in FY18, reflecting a strong asset base and growth potential.

• Target Price and Rating:

  • The analyst maintains a BUY rating and raises the target price to HK$37.0, up 13% from the previous target of HK$34.5.
  • This implies a 13% potential upside from the current price and reflects a DCF-based valuation with a WACC of 8.7% and terminal growth rate of 3.9%.

Key Financial Metrics

Key Downside Risks

• Execution Risk: Potential challenges in executing rural connection projects.
• Gas Demand: Lower-than-expected demand for gas.
• Cost Pass-Through: Failure to pass through increased gas costs to end-users during winter.

Shareholding Structure

• Beijing Enterprises Group: 24.9%
• China Gas Group Ltd.: 15.2%
• SK E&S Co. Ltd.: 14.2%
• Capital Group Companies Inc.: 8.0%
• No. of Shares Outstanding (mn): 4,969
• Free Float (mn): 1,747

Key Assumptions and Earnings

Summary of Key Figures

• Price Performance:
  • 1-month: 0.0%
  • 6-month: 48.1%
  • 12-month: 132.9%
• 52-week range (HK$): 14.78-36.7
• Market Cap (HK$ mn): 161,970
• Avg. Daily Volume (mn): 7.84
• BVPS (HK$) (2019E): 5.73
• 12-month blended forward P/E: 18.1x
• 12-month blended forward P/B: 4.6x

Analyst Meeting Highlights

• Rural Connection Rollouts:

  • Management revised up rural connection rollout guidance for FY19 to 2.0mn and FY20 to 2.8mn, with a new guidance of 3.6mn for FY21.
  • The company expects continued growth in rural projects due to the coal-to-gas conversion program in Northern China.
  • As of FY18, 80% of A/R related to rural connections has been collected, indicating strong financial performance.

• Gas Sales Margin Stability:

  • Management expects a stable gas sales dollar margin in FY19 with a slight decrease of RMB0.01-0.02/cu m.
  • This is due to the alleviation of gas shortage in the year.

• VAS Growth:

  • Sales of wall-hanging gas heaters and kitchen appliances under the "Gasbo" brand saw significant growth.
  • VAS revenue is expected to grow 51.5% in FY19 and 42.6% in FY20, contributing positively to core profits.

Conclusion

China Gas has shown strong growth in FY18 with recurrent profit up 42% YoY and a revised upward target price. The company is well-positioned to benefit from the coal-to-gas conversion program, rural connection rollouts, and VAS expansion. Despite some financial adjustments, the BUY rating remains due to positive long-term outlook and improved financial metrics. The key downside risks include execution challenges, lower gas demand, and cost pass-through issues, but the company's strategic initiatives and management guidance suggest a robust growth trajectory.