What's new
　　On January 5, 2022, Beijing Enterprises Holdings (BEHL) repurchased 500,000 shares at HK$27.45-27.55/sh for HK$13.75mn. We believe this buyback is significant, and we expect it to benefit its valuation recovery.
　　Comments
Resumption of share buyback of great significance. BEHL had a large　share buyback in 2008, at a price of around HK$25/sh, after it acquired Beijing Gas from the group in 2007. Since then, BEHL conducted share buybacks in 2011 and 2014-2017 (at HK$33-67/sh). The firm’s most recent share buyback was in May 2017, and it bought back 100,000 shares at HK$37.2. Years later, BEHL restarted the share buyback, reflecting the new management's efforts to maintain the firm’s image and protect the interests of shareholders, which is significant, in our view. We think that the firm may implement several share buybacks judging from the company’s track record. We do not rule out the possibility that the firm may continue to buy back its shares on the open market.
　　Strong expectation of rising dividend payout ratio; share buybacks　may send a positive signal. On December 15, 2021, we published an in- depth report "Expectation of increased dividend payout ratio to drive a re- rating", suggesting that investors watch the re-rating of the firm, due to the expectation of rising dividend payout ratio. The firm’s dividend payout ratio has been falling since 2015. We attribute this to the low dividends from its subsidiaries to the parent company, which limited the parent’s cash for distribution. Beijing Gas has never paid dividends to its parent company, although it is one of BEHL’s subsidiaries with the strongest cash flow. We expect the firm’s dividend payout ratio to steadily increase to a high of 30% and above, as: 1) SOE reforms in 2020-2022 encourage listed state- controlled companies to raise their cash payout ratio. 2) Local real estate markets have slowed down in recent years, which may lead to tightening of local finances. We believe that increasing the dividend payout ratio of local SOEs can, to a certain extent, compensate for the decline in government revenue from the land. BEHL is one of the most profitable firms under Beijing SASAC. 3) Members of the firm’s new management have all served as senior executives in Beijing Gas Group. We believe this is conducive to facilitating Beijing Gas’ dividend distribution to the parent company. We believe that BEHL’s share buyback has sent a positive signal to the capital market prior to the FY21 dividend decision.
　　Valuation and recommendation
　　We maintain FY21 and FY22 earnings forecasts. We introduce FY23 earnings forecast at HK$9.99bn. We maintain our TP of HK$39.0, implying 6x and 5x FY22e and FY23e P/E with 43% upside. We maintain an OUTPERFORM rating. The stock is trading at 4x and 3x FY22e and FY23e P/E.
　　Risks
　　Beijing Gas business growth and dividend to parent company disappoint; earnings decline at China Gas extends longer than expected.