Towngas Smart Energy reported 2022 revenue of HK$10.16bn (+31% YoY) and earnings of HK$1.04bn (+34% YoY), in which separately embedded derivatives of the convertible bond profits of HK$522m. The company’s reports EPS of HK$0.33.
　　Performance is basically in line with expectations. In 2022H1, the company’s gas sales were 7.54bn m3 (+4% YoY), Pipeline gas and energy sales achieved a revenue of HK$8.64bn (+33% YoY). For gas sales price follows the peak season price in Q2, contango in industry and commerce smoothly, and gross margin rise from Rmb0.48/m3 in 2021H2 to Rmb0.50/m3 in 2022H1. The company added 2 new urban gas projects, reaching a total of 178; the number of customers increased by 0.41m, reaching a total of 15.5m in 2022H1. The conversion price for the issuance of convertible bonds to Affinity in 2021 will be HK$6.33 per share. By the end of 2022H1, the company’s share price is HK$4.18, which is lower than the conversion price. The difference in fair value affects the company’s net profit of HK$522m. Excluding the profit of convertible bonds, the company’s net profit decreased to HK$520m (-16% YoY). Financing costs also increased by 58% YoY, due to the acquisition of Shanghai Gas and the issuance of green bonds.
　　Diversified gas source structure reduces costs. In H1, 2% of the company’s gas is self-produced, and 10% comes from LNG and unconventional gas sources other than the three oil giants. The company effectively control the gas cost, and the company’s gross profit margin increase from 8.84% in 2021 to 9.15% in 2022H1. In July 2021, the company acquire 25% equity of Shanghai Gas and carry out comprehensive cooperation in the fields of LNG gas source and city gas. In addition, the company will obtain the import resources of Caofeidian LNG terminal in H2, and gradually expand the scale of domestic gas including Shaanxi, Ningxia and Sichuan LNG plants. With the deepening of the diversification of the gas source structure, the company will further improve operating efficiency. In 2025, the company plans to increase gas sources other than the three oil giants to 15% of the total.
　　Multi-dimensional development of smart energy business. In 2022H1, the company has signed 47 zero-carbon smart park projects. Installed capacity under construction and grid-connected reaches 0.38GW, and the contracted installed capacity is 0.78GW, with 1GW of grid-connected capacity to be installed this year. In addition to the photovoltaic business, the company actively develops comprehensive energy services in green power trading, carbon management, and smart platforms. We expect that the large-scale photovoltaic supporting integrated energy business will give full play to the management synergy of the park, and we are optimistic about the rapid replication of the zero-carbon park across the country.
　　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 without considering gains or losses from changes in fair value of convertible bonds, the estimated net profit is HK$1.11bn/HK$1.42bn/HK$1.67bn respectively (Before adjustment, the expectation of 2022-2024 was HK$1.94bn/HK$2.16bn/ HK$2.47bn). Corresponding to the current stock price, the PE in 2022-2024 is 10x/8x/7x.