2021 core results slightly below our and market expectations
　　TG Smart Energy’s 2021 revenue and core attributable net profit （excluding fair value change of convertible bonds derivative） increased 34% and 11% YoY to HK$17.13bn and HK$1.61bn, while its attributable net profit fell 13% YoY to HK$1.25bn （or HK$0.4/sh）。 The core earnings are slightly below our and market expectations, as the sharp rise of international oil and gas prices in 4Q21 weighed on the dollar margin of gas sales. The firm plans an annual dividend of HK$0.15/sh, flat YoY.
　　Gas business: 2021 gas sales volume rose 21% YoY to 14.6bn cbm, with industrial volume and commercial volume up 28% and 10% YoY to 7.7bn cbm and 1.7bn cbm. Dollar margin of gas sales fell Rmb0.05/cbm YoY to Rmb0.51/cbm, due to rising pipeline gas prices and LNG procurement costs.
　　Smart energy business: As of end-2021, the firm has signed contracts for smart energy solutions with 32 industrial parks, and it aims to increase that number to 50 by end-2022. As of end-March, the firm’s distributed photovoltaic projects that have started construction and connected to power grids totaled 300MW.
　　Trends to watch
　　Growth accelerating for smart energy business. The firm expects grid-connected capacity of distributed photovoltaic projects to reach 1GW in 2022 and 8GW in 2025, with user-side energy storage capacity at 2GW and the smart energy business accounting for 50% of profit. Considering ample project resources and low financing costs, we think the firm will speed up development of the smart energy business and it may become a new growth driver alongside gas business.
　　Numerous measures to lower procurement costs in gas business. The firm expects 2022 gas sales volume to increase 70% YoY （including consolidation of Shanghai Gas）。 However, the firm did not provide guidance on dollar margin. We think geopolitical issues make it difficult to forecast prices for gas and oil. However, we think the profit of the gas business will remain stable, as the firm can improve procurement costs through independent import of overseas LNG and other measures.
　　Consolidation of Shanghai Gas likely to be accomplished in 2022. Shanghai Gas was not consolidated into the firm’s financials in 2021 due to COVID-19 and regulatory reviews. Management expects the deal to be completed before 3Q22, and we think financial consolidation of Shanghai Gas will bring incremental profit.
　　Financials and valuation
　　Considering rising gas sale prices and procurement costs, we raise our 2022 revenue forecast 24% to HK$19.22bn and lower our 2022 earnings forecast 4% to HK$1.71bn. We introduce a 2023 earnings forecast at HK$1.86bn. The stock is trading at 9.0x and 8.3x 2022e and 2023e P/E. We maintain OUTPERFORM and a target price at HK$6.20 （11.5x and 10.5x 2022e and 2023e P/E with 27.6% upside）。
　　Risks
　　Sharp fluctuations in international oil & gas prices; disappointing development of smart energy business.