The core earnings of China Gas slipped 4% YoY to HK$3,966m in FY24, missing its guidance of 5-10% YoY growth. The discrepancy mainly came from the lower-than-expected dollar margin. Looking ahead, we expect its core earnings to grow 25% YoY in FY25 on further improvement in dollar margin and decent growth in gas sales volume and value-added services. We cut our FY25-26 earnings forecasts by 6-8%. Despite this, we reiterate our BUY call as we expect the company to keep its DPS at least at HK$0.50 in the next few years, which translates into a dividend yield of 7%. We lower our target price to HK$7.85.
　　Key Factors for Rating
　　The net profit of China Gas fell 26% YoY to HK$3,185m in FY24, 27% below our forecast. The miss was mainly due to the unexpected HK$685m impairment against accounts receivable and contract assets. On top of this, the lower-than- expected dollar margin and lower-than-expected earnings of value-added services and LPG sales all resulted in lower earnings.
　　While the company’s dollar margin improved from RMB0.42/m3 in FY23 to RMB0.50/m3 in FY24, it was still below its guidance of RMB0.52/m3. The miss was mainly because of the insufficient low cost gas for its residential clients. The coverage of low cost contract volume for residential client was just 77% of its full-year demand. In addition, the progress in passing on the price increase of residential gas was slower-than-expected. Up to the end of FY24, projects accounting for only 55% of its residential gas sales have completed the passing on of higher upstream gas price.
　　In terms of gas sales volume, the company’s retail gas sales grew 2% YoY in FY24, in line with its guidance of low single-digit growth.
　　The operating profit of the value-added services grew 6% YoY. While it was below its guidance of 10% YoY growth, the miss mainly came from the depreciation of RMB against HK$.
　　Key Risks for Rating
　　Further miss in dollar margin.
　　Lower-than-expected growth for value-added services.
　　Valuation
　　We lower our DCF valuation and hence target price from HK$8.40 to HK$7.85 to reflect the cuts in our earnings forecasts and the small increase in WACC (from 6.9% to 7.0%). Our new target price is equal to 8.5x FY25 P/E.