CGH released pressured 1HFY23 results, but its FCF turned positive. Looking ahead in 2HFY23E, CGH’s mgmt. were optimistic, considering: 1) higher gas demand during the heating season; 2) better epidemic control measures may stimulate economic recovery and boost gas demand recovery; 3) effective price-through measures enabled CGH to achieve full-year dollar margin target of RMB0.5cbm; 4) ”Smart Living” maintains robust growth momentum. CGH is trading at undemanding valuation at around 7x FY23 forward PE. We believe gas sales growth may recover as the epidemic measures further relax, and the Smart Living will continue the robust growth momentum. Thus, we assign TP of HK$13.2　to CGH, based on 11x FY23E target PE (~close to avg. 5-year historical PE). We transfer coverage with BUY rating.
　　1HFY23 results were under demand side disruption pressure; Free cash flow turned　positive. Due to the challenging operating environment by pandemic control and higher gas costs, CGH’s core earnings dropped 22.2% YoY to HK$3,289.9mn in 1HFY23; Yet, driven by resilient operating cash flow growth of 14.3% and better-controlled CAPEX and M&A investments, FCF turned positive to HK$0.84bn(~ HK$-3.1bn) in 1HFY23. For FY23E, we believe CGH can maintain positive free cash flow, supported by strong operating cash flow and optimized CAPEX control.
　　The outlook of gas sales and dollar margin are expected to follow economic　recovery in FY23E. In 1HFY23, given macro weakness and higher gas costs, total gas sales volume grew 7.4%YoY (~1HFY22 21.1% YoY) to 16.7bcm and residential gas sales grew 10% YoY (~16.8% YoY in 1HFY22).The dollar margin was in line and recorded RMB0.54cbm. Looking ahead in 2HFY23E, since better epidemic control measures may lead to economic recovery and stimulus gas demand, we expect CGH’s city & township gas sales to grow by 10%YoY, following mgmt’s guidance. Under the effective price- through measures, we estimated the dollar margin to achieve RMB0.5cmb in FY23E.
　　Slower but steady gas connection pace. Given the downward pressure in the real estate industry and delayed connection engineering work under epidemic control. In 1HFY23, the newly-added township connection receded 3.3% YoY, with newly-added city residential connection declined 12.4% YoY. For FY23E, We expect CGH’s full-year new residential connection will reach the mgmt’s full-year guidance of around 2.66mn, and it may tend to level off in the following few years.
　　Smart Living maintained sound growth momentum; VAS developed steadily. VAS’s　GP raised by 0.3% YoY to HK$1.7bn in 1HFY23. In particular, ‘Smart Living’ recorded impressive results. Its GP boosted by 105% YoY to HK$ 767mn, and its pre-tax profit increased by 106% YoY to HK$586mn. In the near future, we believe ‘Smart Living’ will further unleash its value.
　　We assign TP of HK$13.2 to CGH with BUY rating. CGH is trading at around 7x FY23　forward PE. We believe the weak gas sales together with CGH’s slower gas connection expectation have been largely price in. We assign TP of HK$13.2, based on 11x FY23E target PE (~close to avg. 5-year historical PE) to factor in gas growth recovery due to relaxing epidemic control and solid growth momentum of “Smart Living”. We transfer coverage with BUY rating.