The earnings of CR Gas grew 10% YoY to HK$5,224m in 2023, 15% below our forecast. The miss was mainly due to the sharp rise in unallocated expenses, including amortisation, in 2023 following the consolidation of a few big projects. We expect the company to see roughly flat earnings in 2024. While we still see decent growth in its core operations, it will face an uphill task to fill the earnings gap left behind from the booking of HK$1.1bn deemed disposal gain in 2023.
　　Although we cut our 2024-25 earnings forecasts by 15%, we reiterate our BUY call with target price lowered to HK$31.16.
　　Key Factors for Rating
　　The earnings miss was mainly caused by the 75% YoY surge in unallocated expenses to HK$5,928m in 2023. In particular, the depreciation and amortisation of rights-to-use assets and other intangible assets jumped 116% YoY to HK$829m as the assets of newly consolidated subsidiaries, mainly Chongqing Gas (600917 CH/RMB6.17, NR) and Xiamen project, were revalued. Some newly acquired projects may also be less profitable. Had it not been the HK$1.1bn deemed disposed gain from the consolidation of the above two projects, the company may not be able to see profit growth.
　　In terms of operations, the company was in line in all key parameters in 2023: 8% YoY growth in retail gas sales, 19% YoY fall in new residential connections to 3.31m HH and better dollar margin from RMB0.45/m3 in 2022 to RMB0.51/m3 in 2023. The pre-tax profit of the comprehensive services also surged 19% YoY.
　　For 2024, we now expect largely flat earnings. The company’s guidance was quite positive: 6-8% YoY growth in retail gas sales, further improvement in dollar margin to RMB0.52/m3 and 30% YoY growth in the revenue of comprehensive services. The expected 9% YoY fall in new connection to 3m HH is also relatively mild. However, given the absence of the above-mentioned HK$1.1bn deemed disposal gain, the company will have to tighten its cost control in order to achieve flat YoY earnings.
　　Key Risks for Rating
　　Higher-than-expected costs.
　　Faster-than-expected fall in new connections.
　　Valuation
　　We lower our DCF valuation and hence our target price from HK$32.27 to HK$31.16. Although we cut our earnings forecasts quite a bit, part of the cuts come from higher non-cash expenses. Our new target price is equal to 13.9x 2024E earnings.