20180921-招商证券_香港_-中国燃气-00384.HK-Reverse_roadshow_takeaways_9页_1mb

China Gas (384 HK) Summary

Core Content

China Gas (384 HK) is a leading player in the gas sector with a strong focus on rural gas connection and distributed energy projects. The company has been actively expanding its operations, particularly in the rural coal-to-gas conversion and distributed energy segments, which are expected to drive future earnings growth. The report highlights the company's current financial performance, future growth plans, and investment ratings.

Main Points

• Rural Gas Connection Projects:

  • The company has been implementing rural coal-to-gas conversion projects in Qingdao, including two projects in Zhang Chun Henan and Xidengying.
  • Government subsidies were provided for connection fees and gas heaters, reducing the effective gas bill for rural households.
  • Rural households are willing to continue using natural gas even after subsidies expire due to convenience and safety.
  • Over 5 million rural residents have signed contracts, and management is confident in achieving its target of connecting 2.0–3.6 million households in FY19–FY21.

• Distributed Energy Projects:

  • The company's distributed energy projects span three areas: commercial and industrial buildings, industrial zones, and distributed heating.
  • The number of projects is expected to grow from 44 in FY18 to 100 in FY22.
  • Heating areas are projected to increase from 8 million sqm to 100 million sqm, generating significant gas and electricity demand.
  • Management estimates the average IRR for distributed energy projects to be 10–13% excluding gas sales.
  • Net profit from distributed energy is expected to rise from RMB32.4 million in FY18 to RMB1.8 billion in FY22.

• Financial Performance:

  • Revenue is projected to grow from HK$31,993 million in FY17 to HK$103,687 million in FY21.
  • Gross profit is expected to increase from HK$8,377 million in FY17 to HK$21,738 million in FY21.
  • Recurring net profit is forecasted to rise from HK$4,475 million in FY17 to HK$11,393 million in FY21.
  • The company's core P/E ratio is currently at 13.0x FY20E, which is 16% below its five-year historical average of 15.4x.
  • The company's dividend yield is expected to increase from 1.1% in FY17 to 2.7% in FY21.
  • ROE is expected to remain stable at around 23.5% in FY21.

• Investment Rating:

  • The company is rated BUY with a target price of HK$37.0, representing a 58% upside from the current price of HK$23.4.
  • The analyst recommends accumulating shares during recent weakness due to the attractive valuation.

• Key Risks:

  • Higher-than-expected execution risk in rural connection projects.
  • Lower-than-expected gas demand.
  • Difficulty in passing through increased gas costs to end-users during the winter season.

Key Financial Figures

Shareholding Structure

Investment Highlights

• Valuation:

  • The stock is currently trading at 13.0x FY20E P/E, which is 16% below its five-year average.
  • The company's recurring EPS is expected to grow at a 20% CAGR over 2018–2021, outperforming its peers with a 13–15% CAGR.
  • The analyst recommends buying due to the attractive valuation.

• Project Overview:

  • Tsingtao Brewery: Converted 40 steam tons of coal boilers to gas, with a gas dollar margin of RMB0.89/cu m.
  • Zuoyue Center: A 5A commercial building in Qingdao, with 270,000 sqm total floor area. The company charges RMB45/sqm for heating and cooling, leading to RMB10.8 million annual revenue.
  • Heating Market: The company is targeting to expand its heating area to 100 million sqm in five years, with a payback period of 3.1 years based on Shenyang project data.

Conclusion

China Gas is positioned to benefit from continued expansion in both rural gas connection and distributed energy projects. The company's financial performance is expected to improve significantly over the next few years, supported by growth in revenue, gross profit, and net profit. The current valuation is seen as attractive, with a BUY rating and a target price of HK$37.0. However, there are key risks, including execution challenges and potential fluctuations in gas demand.