Kunlun’s net profit grew 11% YoY to RMB5,682m in 2023, missing our forecast by 12% mainly on higher-than-expected staff cost and impairment. Looking ahead, we expect the company to see 11% YoY earnings growth in 2024 on decent gas sales growth and further improvement of profitability of LNG processing plants. More importantly, the company plans to raise its payout ratio from 40% in 2023 to 45% by 2025. We trim our 2024-25 earnings forecasts by 6-7%. We reiterate our BUY call with target price lowered to HK$9.67.
　　Key Factors for Rating
　　The company booked higher staff cost, including bonus, in 2H23 and this resulted in 27% HoH increase in staff cost. The company also booked an impairment of RMB368m against the fixed asset of its gas sales segment. In addition, the average oil price in 2023 also ended up 4% below our forecast.
　　In terms of operations, Kunlun did quite well with retail gas volume up 10% YoY and dollar margin staying flat at RMB0.5/m3. New residential connection edged up 1% YoY. The most important achievement was its LNG processing plants finally managed to breakeven with a post-tax profit of RMB7m.
　　For 2024, the company guides for 10% YoY growth in retail gas volume, 7% YoY fall in new residential connection and 7% YoY growth in processing volume for its LNG processing plants. It also expects the utilisation of its LNG terminals to stay at 90%. Overall, we now look at 11% YoY growth in earnings.
　　The company raised its dividend payout from 35% of its core earnings in 2022 to 40% in 2023. More importantly, it targets to further increase the payout ratio to 45% by 2025 and pay dividend twice a year instead of currently once. This will make it a more attractive yield play.
　　We trim our 2024-25 earnings forecasts by 6-7% mainly to reflect the lower- than-expected earnings of its natural gas sales and E&P segment.
　　Key Risks for Rating
　　Sharp fall in the throughput of its LNG terminals.
　　Higher-than-expected costs.
　　Valuation
　　We lower our DCF valuation and hence target price from HK$9.97 to HK$9.67 to reflect the cuts in our earnings forecasts. Our new target price is equal to 12.2x 2024E P/E.