The net profit of CR Gas dropped 22% YoY to about HK$4.1bn in 2024, 25% below our forecast. The earnings of gas sales, new connection and comprehensive services all missed. We now expect its earnings to grow 5% YoY in 2025 as the continued decline in new connections will offset the growth at other operations. We cut our 2025-26 earnings forecasts by 25%. Despite this, the company’s 2024 free cashflow was in line with our forecast given the tightened control on capex. Hence, we maintain our BUY call with target price reduced to HK$31.24.
　　Key Factors for Rating
　　Owing to the warmer-than-expected winter, the gas sales (including gas stations) of CR Gas only grew 2.9% YoY in 2024, 2% below our forecast. Although the improvement in dollar margin from RMB0.51/m3 in 2023 to RMB0.53/m3 in 2024 was in line with our forecast, the RMB8.22bn (up 8% YoY) EBIT of its gas sales still missed our forecast by 4%.
　　In 2024, the company’s new connections of residential users dropped 19% YoY to 2.69m HH, 7% below its guidance of 2.9m HH. The EBIT of new connection dropped at a faster rate of 28% YoY (to RMB2.93bn, 7% below our forecast) in 2024 as EBIT margin contracted (from 37.1% to 31.6%) as the ratio of new connection from renovation of old buildings, which usually commands lower margin, rose from 13.0% in 2023 to 21.4% in 2024.
　　The EBIT of comprehensive services business edged up 2% YoY only to RMB1.4bn on 4% YoY growth in turnover. This was 19% below our forecast as this is a growth business and is supposed to grow much faster.
　　Despite the misses, the company’s core earnings were flat in 2024 after removing all non-cash deemed disposal gains in 2023. Its free cashflow even increased 14% YoY to HK$2.58bn as it cut its capex by 44% YoY to HK$4.42bn.
　　The company tried to reward shareholders by increasing its dividend payout ratio from 50.2% in 2023 to 52.7% in 2024.
　　Key Risks for Rating
　　Weaker-than-expected gas sales.
　　Further miss in earnings of new businesses.
　　Valuation
　　We lower our DCF-based target price from HK$34.37 to HK$31.24. We are not cutting our target price as much because the company’s free cashflow of about HK$2.6bn in 2024 was in line with our forecast and the impact on free cashflow from our cuts is not as big as the impact on earnings. Our new target price is equal to 16.4x 2025E earnings.