20221207-招银国际-中国燃气-00384.HK-Expect_mild_recovery_ahead_9页_1mb

China Gas Holdings (384 HK) Summary

Core Content and Key Information

China Gas Holdings (CGH) released its 1HFY23 results, which were affected by demand-side disruptions, but the company managed to achieve positive free cash flow (FCF) for the first half of the year. The FCF reached HK$0.84bn, which is a positive indicator despite the challenges posed by the pandemic and higher gas costs. Core earnings declined by 22.2% YoY to HK$3,289.9mn, but the company's resilient operating cash flow growth (14.3%) and optimized capital expenditures (CAPEX) and mergers & acquisitions (M&A) investments helped turn FCF positive.

For FY23E, CGH is expected to maintain positive FCF, supported by strong operating cash flow and controlled CAPEX. The company's management is optimistic about the recovery in gas sales and dollar margin, which are expected to align with the economic recovery. With the relaxation of epidemic control measures, CGH anticipates a 10% YoY growth in city and township gas sales. The dollar margin is estimated to reach RMB0.5cbm for the full year.

Valuation and Target Price

CGH is currently trading at around 7x FY23E forward PE, which is considered undemanding. The target price (TP) assigned is HK$13.2, based on an 11x FY23E target PE, close to the average 5-year historical PE. This TP reflects the potential for gas sales recovery and the continued strong growth of the "Smart Living" segment. The analyst has transferred coverage with a BUY rating, indicating confidence in the stock's performance.

Smart Living and VAS Growth

The "Smart Living" segment has shown impressive growth, with a 105% YoY increase in gross profit (GP) to HK$767mn and a 106% YoY rise in pre-tax profit to HK$586mn. It accounts for approximately 51% of CGH's total VAS pre-tax profit in 1HFY23. The segment is expected to double its pre-tax profit in FY23E, further enhancing its growth momentum.

Smart Living has also introduced a "3x3x3" GaaS business model, combining offline services with online technologies and direct sales with fission marketing to provide a comprehensive smart living experience. The company plans to expand its client base beyond local gas companies to other prominent utility sector clients, aiming to become an advanced VAS operator in the long term.

Gas Sales and Connection Growth

In 1HFY23, gas sales volume increased by 7.4% YoY to 16.7bcm, with residential gas sales growing by 10% YoY. However, the pace of gas connections slowed, with newly-added township connections decreasing by 3.3% YoY and city residential connections declining by 12.4% YoY. For FY23E, CGH is targeting around 2.66mn new residential connections, with the expectation that this growth may level off in the following years.

Financial Highlights

• Revenue: Expected to grow at a CAGR of 14.6% for FY23E, reaching HK$101,124mn.
• Net Profit: Projected to be HK$6,917.8mn for FY23E, with a YoY decline of 9.7%.
• EPS: Expected to be HK$1.20 for FY23E, with a YoY decline of 15.4%.
• P/E Ratio: 7.33x for FY23E, indicating a relatively attractive valuation.
• P/B Ratio: 0.8x for FY23E, suggesting a low valuation relative to book value.

Analyst Ratings and Market Position

• CMBIGM Rating: BUY, with a target price of HK$13.2, reflecting a potential return of over 15% over the next 12 months.
• Peer Comparison: CGH's P/E and P/B ratios are lower than the industry average, suggesting potential undervaluation.
• Market Performance: The stock has shown mixed performance over the past year, with a 12-month price performance of -17.4% in absolute terms and -10.8% relative to the market.

Key Growth Drivers

1. Economic Recovery: Expected to stimulate gas demand as epidemic control measures ease.
2. Smart Living Expansion: Continued robust growth in VAS and plans for spin-off and IPO.
3. Price-Through Measures: Effective strategies that help maintain dollar margin targets.
4. Optimized Operations: Controlled CAPEX and strong operating cash flow support FCF positivity.

Financial Summary Highlights

• Net Profit Margin: Expected to decline slightly to 6.8% in FY23E.
• EBITDA Margin: Expected to decrease to 13.8% in FY23E.
• ROE: Projected to be 9.3% for FY23E, with a slight increase in subsequent years.
• Cash Flow: Strong operating cash flow and positive FCF in 1HFY23, with expected continued positive FCF in FY23E.

Conclusion

Despite the challenges faced in 1HFY23, CGH has demonstrated resilience and is positioned for a mild recovery in gas sales and a strong growth in the Smart Living segment. The company's current valuation is considered attractive, and the analyst's BUY rating reflects confidence in its future performance. The outlook is positive with the potential for growth in both core operations and VAS, driven by economic recovery and effective business strategies.