FY20 core profit grew 10% yoy on strong recovery of new energy and gas sales business in China in 2H20
Mid-teen China FY21E gas sales vol. growth guidance; Sharper focus on future environmental strategy and investment direction
Cash div. maintain at HKD0.35/share (96% payout ratio), 5% share div.; HKCG shares trade at 28.8x FY21E P/E, at 3% div. yield
　　FY20 core profit slightly beat consensus
　　HK & China Gas FY20 net profit fell 14% to HKD6bn, however after adjusting for provision for assets and net investment gain and loss, its core profit grew +10% yoy to HKD6.5bn, slightly above market consensus. Overall revenue largely flat as better performance in new energy business （i.e. +28% yoy） offset its gas sales business in China （i.e. -1% yoy）， while its HK gas sales business revenue dropped 3% yoy. Its overall EBITDA margin rose slightly to 29.2ppt in FY20 （vs. 28.3ppt in FY19） attributed from 1） full year benefit of town gas tariff hike in HK business; and 2） higher gas dollar margin in FY20 in China （i.e. RMB0.59/cu m vs. RMB0.58/cu m in FY19）。
　　Upbeat on gas sales business in China
　　Management guides +13% to 15% yoy gas sales volume growth of its China business in FY21E, as they saw strong gas sales volume recovery for the first two months this year （c.30% yoy overall）。 While they are upbeat on its gas dollar margin, they indicate that there would be RMB0.01/cu m rise in FY21E to reach RMB0.6/cu m benefitting from more LNG procurement in FY21E （i.e.1.5bcm, equivalent to 5.5% of its FY20 gas sales volume）。 Also, its investment in several LNG terminals and a shale gas liquefaction project will further benefit its overall gas procurement cost in mid to long term. In terms of the Shanghai Gas acquisition, they expect the transaction to be completed by 2Q2021.
　　Eye on environmental friendly projects for future growth
　　Management laid out a long-term development plan for businesses outside its core gas sales business, such as extended business （e.g. gas appliance, insurance and lifestyle）， smart energy （e.g. rooftop photovoltaic） and new energy business （e.g. biomass utilisation）， to grasp the potential opportunity from China’s carbon neutrality initiative, while aiming for an IPO for its smart energy segment by 2023.
　　Positive read across on sector recovery trend
　　Strong 2H20 performance and positive guidance from the company reassured the recovery trend and growth path read across. We anticipate positive comments from upcoming ENN and Kunlun results. We remain positive on the sector and BUY on ENN Energy （2688 HK, TP: HKD140）， Kunlun Energy （135 HK, TP: HKD9.4）， China Gas （384 HK, TP: HKD36）。