Towngas Smart Energy reported annual revenue of HK$19.842bn (-1.15% YoY) , operating profits of HK$1.919m (+12% YoY), net profit attributable to the parent of HK$1,575m (+63.2% YoY), and core profit of HK$1,190m (+16.3% YoY), which is basically in line with our expectations. Towngas Smart Energy proposes a final dividend of HK$0.16 per share, leading to a dividend yield of 5.48% based on the closing price on March 19th.
　　Improvements in price-through mechanism and sales structure led to a rebound in gross margin, with broad prospects for future enhancements. In 2023, the company’s dollar margin reached Rmb0.51/m3 (+Rmb0.01/m3 YoY). This is primarily attributed to two factors: 1) The continuous improvement in price-through for residential gas across the country starting from 2H23. 2) The recovery of the macroeconomy coupled with a decrease in gas prices, which help the return of high-margin and price-sensitive industrial and commercial demands, further boosting dollar margin of gas sales. In 2024, for residential gas, the segments that have completed price-through will continue contributing profits throughout the year, and the remaining segments will also get price adjusted within the year, further expanding the dollar margin. For industrial and commercial gas, the continuous decline in upstream gas prices and the high economic value of imported LNG will further boost demand. Regarding the gas source structure, in 2023, the company coordinated a total gas volume of 3.48bn m3with its parent company, accounting for 9.7% of total gas volume and saving costs of Rmb320m. Additionally, the company plans to expand gas procurement channels, aiming to achieve a self-provided gas volume of over 5m tons by 2027. The diversification of gas sources will also help the company to further enhance its dollar margin in the long term.
　　Gas sales volume grew steadily, profitability returned to a growth trajectory. In 2023, the company added four new city gas projects and exited the Shanghai gas project, bringing the total number of city gas projects to 187; the number of customers increased by 840k, reaching a total of 16.77m customers. Benefiting from a 6% growth in industrial gas and a high increase of 18% in wholesale gas volumes, total annual gas sales volume steadily rose to 16.46bn m3(8% YoY). With the gradual decline in gas prices upstream and downstream in 2023, gas business generated a revenue of HK$16.291bn(-0.75% YoY). However, benefiting from an improvement in gross margin, the profit from the gas sales business reached HK$893m(+3.68% YoY). The company’s main gas sales business will welcome opportunities for simultaneous growth in volume and profitability.
　　PV business became profitable, significantly enhancing long-term performance. By the end of 2023, the company had cumulatively signed contracts for an installed capacity of 3GW, of which 1.8 GW was connected to the grid. The company maintained its focus on IRR of projects, prioritized high-quality development, and strengthened the synergistic effects between PV installations and carbon energy services, thereby deeply integrating with high-quality downstream customers. Annual PV electricity generation increased from 0.14bn kWh in 2022 to 0.94bn kWh in 2023, contributing to a profit growth of nearly Rmb200m. Meanwhile, against the backdrop of steady progress in its dual-carbon strategy, the carbon management and "PV plus storage and sales" services demonstrated a significant competitive advantage, achieving robust business growth with carbon energy service revenues increasing by 350% YoY.
　　Maintain BUY. Considering the effective offset of the negative impact from the short-term decline in the connection business by the recovery in profitability of the gas sales business, and taking into account factors such as the slowdown in new energy grid-connected installations, we raise our profit forecasts from HK$1.693bn to HK$ HK$1.728bn in 24E, cut profit forecast from HK$1.881bn to HK$1.873bn in 25E, and add profit forecast for HK$1.982bn in 26E. The stock is trading at 5.7x 24E PE, 5.2x 25E PE and 4.9x 26E PE. We believe the company has ample cash on hand, and its main gas business can provide stable cash flows over the long term, laying a solid foundation for the development of renewable energy businesses, combining stability with growth potential. Maintain BUY.
　　Risks. Rise of gas purchase price; slower-than-expected grid-connected capacity ramp-up.