Kunlun’s net profit grew 5% YoY to about RMB6bn in 2024, 9% below our forecast. The discrepancy mainly came from lower-than-expected earnings from the natural gas sales and LPG sales segments. We expect Kunlun to see 11% YoY earnings growth in 2025 on the further improvement of profitability of natural gas processing plants and the growth at natural gas sales segment. While we cut our 2025/26 earnings forecasts by 9%/8% respectively and lower our target price to HK$10.08, we reiterate our BUY call.
Key Factors for Rating
The operating profit of its natural gas sales segment dropped 3% YoY to RMB7.3bn in 2024. Although the dollar margin of its retail gas dropped RMB0.03/m3 (or 6%) YoY, it cannot be explained considering the 8% YoY growth in retail gas volume. Rather, the booking of RMB565m impairment and the contraction in margin on wholesales gas should have dragged the earnings. The profit of LPG sales business also fell short as the estimated price spread per tonne contracted in 2H24.
On the positive front, the pre-tax profit of its LNG processing plants jumped 3.1x YoY to RMB84m in 2024 as its processing volume surged 26% YoY.
We expect Kunlun’s earnings to grow 11% YoY in 2025. The natural gas sales should be the key growth driver as the company guides for 8% YoY growth in retail gas sales and we assume no more impairment. While it expects 15-27% YoY fall in new connections, it should not matter much as it only accounted for 8% of its pre-tax profit in 2024 based on our estimation. In addition, the profit of its LNG processing plants should further improve on 7% YoY planned increase in processing volume.
The company guides for 3% YoY fall in sales volume of LPG considering the major overhaul of domestic refineries, which will limit the upstream LPG supply.
The company’s payout ratio should increase from 43% of core earnings to 45% in 2025. Given its solid balance sheet (net cash at RMB21bn at end-2024) and strong free cashflow (estimated to be RMB4-8bn in 2025-27E), the company has room to further increase payout ratio.
Key Risks for Rating
Lower-than-expected dollar margin.
Higher-than-expected costs.
Valuation
We lower our DCF-based target price from HK$10.97 to HK$10.08 to reflect the cuts in our earnings forecasts. Our target price is equal to 12.3x 2025E P/E.