Huatai Securities lowers target price on China Gas after FY22 results

China Gas recently announced its annual results for the year ended March this year, with revenue of HK$88.2 billion, up 26.1% YoY. Huatai Securities lowered its target price to HK$18.59 and expects a recovery in the company's performance, taking into account sales growth and operational deleveraging.

China Gas released FY22 results, with core profit down 22% YoY to HK$8.05 billion, in line with Bloomberg consensus estimates (HK$8.20 billion). The company declared a final dividend of HK$0.45 per share, representing an annual payout ratio of 37% (FY21: 30%) and a dividend yield of 4.7%.

In FY22, the company's total natural gas sales volume reached 36.7 billion cubic meters (up 17.6% YoY), with a retail gas volume of 21.9 billion cubic meters (up 17.2% YoY) and a direct supply and trade gas volume of 14.8 billion cubic meters (up 18.2% YoY). Taking into account the following factors, Huatai Securities expects FY23 gas sales growth to be 11.9%, connection, and engineering business to be stable (excluding warm home connection), and the number of new connections to be flat YoY.

(1) Increased residential gas ventilation and ignition rates.

(2) Growth in commercial and industrial gas consumption, benefiting from China's carbon reduction targets.

(3) The Company increased the scale of LNG trading. The number of new residential customers connected to the Company's FY22 was 2.94 million, down 42% YoY, and the number of rural coal-to-gas connections fell 84% YoY due to a significant slowdown in the pace of rural coal-to-gas conversion.

The Company's FY22 operating profit margin (OPM) decreased by 7.0 percentage points to 11.8%, mainly due to the following reasons:

(1) Delayed gas price transmission, resulting in a YoY decrease in gross gas sales margin of RMB0.09 to RMB0.50.

(2) Higher raw material prices and stable connection fees dampened the profitability of the connection business. As the revenue share of low-margin businesses (LNG direct supply and trading and LPG sales) increases, the Company's OPM is expected to remain relatively low in FY23-FY25.

Maintain 11x PE (3-year historical average) and lower the target price by 6.6% to HK$18.59. According to the forecast, the company's current share price corresponds to 7x 12-month forward PE, which is not a high valuation. Maintain a "Buy" rating.