CGH released FY23 earnings. Net profit was HK$4,293mn, down 44% YoY which was lower than consensus and our estimates. However, its cash flow turned positive to HK$10.03bn. Based on the recent announcement of spin-off of “Smart Living” and mgmt’s optimistic FY24 guidance on gas sales business, we believe CGH’s FY24E results performance will be improve and its potential　value will be unlocked afterwards. We trim FY24/25E EPS by 15/7%, and cut TP by 12% to HK$11.78, based on 11x FY24E PE. Maintain BUY.
　　FY23 results missed consensus estimates. For FY23, CGH’s revenue　increased by 4.3% YoY to HK$91.99bn, driven by stable piped gas sales and value-added services, while gas connection revenue was lower than expectation. CGH made net profit of HK$4,293mn in FY23, down 44% YoY.
　　The net profit was mainly dragged by following factors: 1） gas sales volume’s growth only achieved 7% YoY （lower than our estimate of 10%）； 2） dollar margin recorded RMB0.42/cbm （vs our estimate ~RMB0.5/cbm） due to delayed cost-through measures and higher gas cost; 3） share profit from JVs and Associates exhibited a drop owing to the weak operation and higher cost; Major expenses were largely in line; CGH declared a final dividend of HK$0.50/share.
　　Expecting a profit increase of over 30% YoY in FY24E. For FY24E outlook, mgmt. guides: 1） 10% YoY increase in city & township gas sales volume; 2） 1.8-2.0mn household new residential gas connection; 3） dollar margin improves to RMB0.56/cbm; and 4） value-added service gross profit to increase by 25% YoY. Adding those targets up, CGH’s mgmt. expects net profit in FY24E to increase 30% YoY. Based on our model estimation, we predicted the net profit will up by 34.4%YoY, attributable to total gas sales volume up by 11.9%YoY, dollar margin will achieve RMB0.56cbm;LPG sales volume expect to reach 4.15mn tonnes; VAS segment will record gross profit of 25%.
　　Cutting TP by 12% to HK$11.78; maintain BUY. Based on mgmt.’s　guidance and our operating assumptions revisions, we cut CGH’s FY24/25E EPS by 15%/7% to HK$1.07/1.15 respectively, as we estimated annual city gas connected users will drop by 2%YoY to 1.97mn, and gas connection revenue adjust to HK$5,852mn in FY24E; industrial gas sales growth lower to 12.7%YoY. Our TP is cut by 12% to HK$11.78, based on 11x FY24E PE to reflect gas connection slowdown and cost-through measures may still take time to implement. Additionally, China Gas previously announced ‘Smart Living’ had been approved by the SEHK to enter the spin-off listing process, thus, we believe the potential value of China Gas’s value-added business will be further unlocked. We stay optimistic on CGH’s dollar margin improvement and long-term development. Maintain BUY rating.