We expect China Gas to post 2% YoY growth in net profit when it announces FY24 results next Monday. The company should be able to meet its guidance of gas sales growth and dollar margin. Nevertheless, it should reach the low end of its guidance for new connections and its SG&A expenses and finance cost should remain high. We cut our FY24-26 earnings forecasts by 9-11%. Despite this, we reiterate our BUY call as we believe the company will try its best to maintain its DPS at about HK$0.5, which translates into attractive yield of 6.7% at current price. We slightly raise our DCF-based target price to HK$8.40.
　　Key Factors for Rating
　　We expect the company’s retail gas sales to grow 1% YoY in FY24, meeting its guidance of low single digit growth. This should reverse the 2% YoY decline in 1HFY24 on recovery of demand from C&I clients and more abundant upstream gas supply from the domestic oil majors.
　　The dollar margin should also meet its guidance of RMB0.52/m3 for FY24, up from RMB0.42/m3 in FY23, after achieving dollar margin of RMB0.57/m3 in 1HFY24. The company should have avoided a repeat of the collapse in dollar margin seen in winter 2022/23 given the undertaking from Hebei Provincial Government to ensure the dollar margin of its coal-to-gas conversion projects in the province at RMB0.60/m3 during winter 23/24.
　　We expect the company’s new connections to drop 35% YoY 1.5m HH in FY24, the low end of its guidance given its high exposure to lower-tier cities. In addition, its SG&A expenses should remain high in 2HFY24 HoH.
　　We also believe its value-added services to meet its target of 10% YoY earnings growth in FY24. While the sharp fall in new connection should have dragged offline sales, the online sales should still see rapid growth. It has also oragnised sales campaigns to take advantage of government subsidies on the trade-in of old electrical appliances and kitchen appliances for new ones.
　　We cut our FY24-26 earnings forecasts by 9-11% mainly to reflect lower new connections, higher SG&A, higher finance costs and weaker RMB FX rate.
　　Key Risks for Rating
　　Slower-than-expected progress in pass through of residential gas price.
　　Further sharp fall in new connections.
　　Valuation
　　We lower our WACC from 7.1% to 6.9% as the cuts in earnings forecasts has resulted in higher gearing. Together with the rollover of base year from FY24 to FY25, we marginally raise our DCF valuations and hence target price from HK$8.30 to HK$8.40 despite the cuts in our earnings forecasts.