20180710-招商证券_香港_-中国燃气-00384.HK-Post_FY18_results_Shanghai_and_Taiwan_NDR_takeaways_7页_1mb

China Gas (384 HK) Summary

Core Content

China Gas (384 HK) is a key player in the natural gas and value-added services (VAS) sector, benefiting significantly from the Chinese government's anti-pollution action plan. The report highlights the company's confidence in meeting its rural gas connection targets for FY19-21, as well as the sustainable growth of its VAS business driven by the demand for gas appliance replacements in rural areas.

Main Points

• Anti-Pollution Action Plan: On 27 June 2018, the Chinese government announced the "Three year action plans for fighting for the blue sky," which includes expanding rural coal-to-gas conversion programs to the Fen-Wei Plain and Yangtze River Delta. China Gas is a leading beneficiary of this policy.

• Rural Gas Connection Targets: The company has already signed contracts for over 5 million rural households as of June 2018, with a target of 2.0–3.6 million households for FY19–21. It is expected to continue signing more contracts and meet these targets.

• VAS Growth: In FY18, China Gas achieved a 162% YoY increase in VAS operating profit. Management expects a 40–50% YoY growth in the VAS segment for FY19–21. The long-term growth is supported by the replacement needs of 41 million households, with 10% replacement rate annually and China Gas capturing 50% of the market share.

• Financial Performance: The company reported strong financial results in FY18, with revenue increasing to HK$52,832 million, and net profit reaching HK$6,095 million. The core profit is expected to grow steadily, with a target of HK$11,393 million in FY21.

• Earnings Impact from Price Hike: The recent city gate price hike for residential users in 8 provinces will be passed through, affecting earnings by approximately HK$30–40 million in FY19, which is about 0.4–0.5% of net profit.

Key Financial Metrics

Investment Recommendation

• Rating: BUY
• Previous Target Price: HK$34.5
• Current Target Price: HK$37.0
• Potential Upside: +12% from the previous price of HK$33.05

Strategic Development

• China Gas has formed joint ventures with local governments in Shaanxi and Anhui, and is preparing to enter the Pearl River Delta market.
• The company has secured a significant number of rural household contracts and is well-positioned to meet its future connection targets.

Shareholding Structure

• No. of Shares Outstanding (mn): 4,969
• Free Float (mn): 1,747

Market Performance

• 384 HK: 1m: -1.8%, 6m: +60.3%, 12m: +95.2%
• HSCEI: 1m: -11.5%, 6m: -12.1%, 12m: +5.0%
• Sector: Oil and Gas
• Market Cap (HK$ mn): 164,210
• 52-week Range (HK$): 17.22–36.7
• Avg. Daily Volume (mn): 7.42
• BVPS (HK$) (2019E): 5.73

Financial Ratios

Key Takeaways from NDR

• The NDRs in Shanghai and Taiwan focused on the impact of the anti-pollution plan, rural connection development, and VAS sustainability.
• The company is confident in meeting its rural connection rollout guidance and is expected to continue expanding its market share in the coal-to-gas conversion programs.

Risk and Disclosure

• The report is prepared by China Merchants Securities (HK) Co., Ltd. and is for informational purposes only.
• It does not constitute investment advice, and investors are advised to make their own decisions based on independent research and financial considerations.
• The document is subject to legal restrictions and is not available to all investors globally. It is intended for specific jurisdictions and individuals.