1H22 core results in line with market expectation
Towngas Smart Energy revenue rose 31% YoY in 1H22 to HK$10.16bn, and attributable net profit grew 34% YoY to HK$1.04bn (HK$0.34/sh). We attribute the YoY earnings growth mainly to the change in fair value of the embedded derivative component in convertible bonds. Management said that the firm’s core earnings declined 15% YoY (excl. the aforementioned change in fair value and higher financial costs from bridging loans to acquire Shanghai Gas). The decline in core earnings was mainly caused by YoY drops in the gross profit of gas sales business, and in line with market expectation.
Gas sales business: Gas sales volume rose 4% YoY in 1H22 to 7.54bn cbm, with industrial and commercial gas volume up 3.1% YoY to 4.65bn cbm. The dollar margin was Rmb0.5/cbm, down Rmb0.05/cbm YoY (up Rmb0.02/cbm HoH).
Connection business: The number of new households connected reached 410,000 in 1H22, and connection business revenue rose 32% YoY to HK$1.20bn.
Renewable energy business: At end-1H22, the firm has developed 47 projects for zero-carbon smart industrial parks. It also had 0.78GW in contracted distributed photovoltaic (PV) projects, while 0.38GW in projects under-construction and grid-connected.
Trends to watch
Full-year guidance for city-gas operation segment beats market expectation. During the results conference, management guided full-year growth of gas sales volume at 8–10% YoY (excl. Shanghai Gas) with the retail dollar margin at Rmb0.51–0.52/cbm. While the guided volume growth was slower than in early 2022, the new guidance indicates double-digit volume growth in 2H22 and further HoH expansion in dollar margin. The full-year guidance for the city-gas operation segment exceeds market’s pessimistic expectation.
Renewable energy business to start contributing to earnings from 2023. Management expects end-2022 grid-connected and under-construction distributed PV projects to reach 1GW, with the contracted volume reaching 1.8GW; thus, management expects substantial contribution to net profit from 2023. We expect the renewable energy business to become a second growth driver as it matures.
Financials and valuation
Due to rising costs of the gas sales business, we lower 2022 and 2023 net profit forecasts 13.4% and 10.6% to HK$1.48bn and HK$1.66bn. The stock is trading at 8.0x and 7.1x 2022–2023e P/E. We maintain OUTPERFORM. Given our lower earnings forecasts, we cut our TP 17.7% to HK$5.10 (11.2x and 10.0x 2022–2023e P/E) offering 40.9% upside.
Risks
Unexpected rises in upstream natural gas prices; disappointing development of renewable energy business