Towngas Smart Energy reported 2021 revenue of HK$17.13bn (+34% YoY). Excluding the loss of HK$359m from separately embedded derivatives of the convertible bond, the net profit is 1.61bn (+11% YoY). The company declared a final dividend of HK$15 cents per share.
Gross margin declines. The company’s gas sales were 14.6bn m3 (+21% YoY), Pipeline gas and energy sales achieved a revenue of HK$13.95bn (+36% YoY). Due to the rising LNG market price in 2021, the upstream price increase caused the gross margin to drop from Rmb0.57/m3 in 2020 to Rmb0.51/m3. Gross margins decrease from 12.82% in the previous year to 8.84%, the growth rate of net profit was lower than the revenue. The conversion price for the issuance of convertible bonds to Affinity in 2021 will be HK$6.33 per share. By the end of 2021, the company’s share price is HK$6.78, which is higher than the conversion price. The difference in fair value affects the company’s net profit of HK$359m. Excluding profit and loss, the company's net profit increased (+11% YoY).
The investment revenue of Shanghai Gas will be recognized in 2022. In July 2021, the company acquire 25% equity of Shanghai Gas, but the investment revenue is not recognized in 2021. In the future, Shanghai Gas will have a cross-shareholding with Towngas Smart energy and carry out comprehensive cooperation in the fields of LNG gas source and city gas. In addition, Towngas Smart energy will set up a flexible gas source procurement for the pipeline gas, gas storage and LNG, import long-term agreement gas through LNG terminals such as Caofeidian LNG terminal in Hubei and Sichuan Weiyuan shale gas liquefaction manufacturer to expand upstream resource.
Expand smart energy Business. In 2021, the company has signed 32 zero-carbon smart park projects and plans to add 40 above industrial parks in 2022. The zero-carbon project plans to launch a comprehensive energy service business with distributed photovoltaic roofs, energy storage, carbon management and other aspects for industrial and commercial customers. At the end of 2022, the company plans to expand the business to Bohai Rim, the Yangtze River Delta, the Greater Bay Area, and other key industrial cities, and achieve a cumulative distributed photovoltaic project of 6GW and a grid-connected installed capacity of 1GW.
Maintain Buy rating. Considering the factors of additional revenue from investment of Shanghai Gas, rising gas price of the upstream market and new energy grid-connected installed capacity, we adjust the profit forecast for 2022-2024, the estimated net profit is HK$1.94bn, HK$2.16bn and HK$2.47bn respectively (Before adjustment, the expectation of 2022-2023 was HK$21.19bn, HK$125.6bn), maintain BUY rating Risks: The price of natural gas has risen sharply; the scale of new grid-connected capacity is lower than expected.