Towngas Smart Energy reported 1H23 revenue of HK$9.88bn （-3% YoY） and operating profits of Rmb742m（+4% YoY） and of HK$835m （-3% YoY） owing to exchange rate changes. Influenced by the company’s net gain of HK$600m from the exit of Shanghai Gas, the net profit attributable to the parent was HK$1.115bn （+7% YoY）， basically in line with our expectations.
　　Gas sales volume grew steadily, connection business dragged down the profitability. In 1H23, the company added three new city gas projects and exited the Shanghai gas project, the total number of city gas projects reached 185. The number of customers added 430k to 16.36mn.
　　Benefiting from 6% growth in industrial gas, which accounted for the largest share, and high growth of 37% in other distribution and power station consumption, the total gas sales volume rose steadily to 8.23bn m3 （+9% YoY） in 1H23. However, affected by the lower-than-expected connection business and the sharp rise in HKD exchange rate, connection business revenue fell by about 20%, and gas business net profit declined by 9.3% YoY to HK$832m.
　　Dollar margins increased slightly and may continue to increase. The dollar margin of gas sales in 1H23 reached Rmb0.50/m3 （+Rmb0.01/m3 vs 2H22）。 Residential gas and commercial gas prices increased by Rmb0.03/m3 and Rmb0.24/m3 respectively. Due to the sale of some large- scale industrial gas at a discount, industrial gas price dropped by Rmb0.04/m3, and the company’s dollar margin in 1H23 is flat with 1H22. The company lowered its full-year dollar margin guidance from Rmb0.52 to Rmb0.51/m3. For source structure, the three-barrels, LNG and others accounted for 87%/9%/4% respectively. The company plans to join with its parent company to broaden source procurement channels and raise more than 5mt of gas after 2025 to reduce the comprehensive purchase cost. In 2H23, we believe that the company will benefit from the improvement of residential price-through and the optimisation of gas sales structure, and we expect the dollar margin to improve in 2H23.
　　Net gain of HK$600m recognised on exit from Shanghai Gas project. On May 23rd, the company signed an agreement with Shanghai Gas and Shenergy Group. On August 2nd, the company received the transaction consideration payment of Rmb4.66bn. The company recognised a net gain of HK$600m from the exit of Shanghai Gas while continuing cooperative relationships in resource acquisition, value-added business, and renewable energy business.
　　Slow down the pace of installation to ensure high-quality and sustainable development. By the end of the 1H23, the company has signed a cumulative installed capacity of 2.2GW, of which 1.2GW is grid-connected. When the downstream industrial and commercial users still have operation pressure and the global financing cost remains high, the company insists on the return rate of projects and pays more attention to high-quality development, strengthening the collaborative effect of PV installation and energy-carbon service to bind high-quality downstream customers in depth. The company lowered its full-year PV installation guidance, planning for a cumulative grid-connected 2.3GW by the end of 2023（-0.7GW than before）， while guaranteeing a PIRR of 9%. Renewable energy business achieved a net profit of HK$3m in 1H23. Following the processing of the double carbon policy, we believe that the PV installation has high certainty in a long-term boom. The company can choose to cooperate with the capital side to reduce the financial risk and superimpose on the energy carbon services and other light asset operations to enhance the comprehensive rate of return of projects.
　　Maintain BUY. Considering the company’s exit from the Shanghai gas project confirmed in 2023 to recognize revenue, while the dollar margin recovery is less than expected, the short- term decline of the connection business, the new energy grid-connected installation slowed down, we raise our profit forecasts from HK$1.35bn to HK$1.64bn in 23E, cut profit forecasts from HK$1.73bn to HK$1.69bn in 24E and from HK$2.01bn to HK$18.8bn in 25E. The stock is trading at 6.9x 23E PE, 6.6x 24E PE and 5.9x 25E PE. We maintain our BUY rating.
　　Risks. Rise of gas purchase price; slower-than-expected grid-connected capacity ramp-up.