In the past two years, urban fuel companies have generally faced the problem of profit pressure, which has become a common challenge faced by the entire industry.

Basically, for most urban fuel companies, natural gas sales are the main source of revenue, and gross margin earned from it is the main source of profit. Against the backdrop of rising natural gas prices due to the geographical conflict in the past two years and poor internal market facilitation mechanisms, the gross margin of urban fuel companies has narrowed, putting pressure on the overall profitability of the industry.

However, as the adverse effects of the external environment gradually dissipated, compounded by the high level of global oil and gas capital expenditure, the fall in gas prices eased the profit pressure on urban fuel companies. Moreover, under the leadership of many local governments, the smooth price mechanism between upstream and downstream is becoming more and more smooth. Upstream oil and gas resource companies have begun to gradually sign annual contracts with downstream urban fuel companies for gas volumes, and urban combustion companies' gas business is expected to be repaired.

If you look at it from a longer-term perspective, under the 3060 vision, a new round of energy revolution has already begun, and leading urban combustion companies are transforming in the direction of renewable energy. This also means that perhaps we should not treat these companies as simple urban combustion companies.

To explain the above logic in detail, an observation sample is also needed. As the first company in the industry to announce its 2023 annual financial report, Hong Kong and China Gas can serve as an example.

1. The basic gas tray has more space

Overall, the most prominent highlight of Hong Kong and China Gas's 2023 financial report is the restoration of profitability. In 2023, the company's net profit to mother increased 16% year over year to HK$6.07 billion.

(Data source: company announcement)

To achieve this, maintaining the steady development of the basic gas business of China Gas in Hong Kong is an indispensable part. However, unlike other gas merchants, the gas business of China Gas in Hong Kong needs to be viewed in two.

In the Hong Kong region, Hong Kong China Gas is the oldest public service agency in the region and the only company operating pipeline gas in Hong Kong. By the end of 2023, its pipeline network had covered 2.02 million households in Hong Kong. In 2023, the Group's gas sales volume in Hong Kong reached 27125 TJ, basically the same as the previous year.

If the gas business of Hong Kong and China Gas in Hong Kong highlights the word “stable,” then its gas business in the mainland focuses on the word “increase.”

Mainland gas sales increased 8% year over year, reaching 34.7 billion square meters.

This is inseparable from the trend of upward restoration of the general environment. In 2023, China's apparent consumption of natural gas continued to increase month by month. The annual apparent consumption of natural gas was 394.53 billion cubic meters, an increase of 7.6% over the previous year.

Driven by the goal of double carbon, there is still plenty of room for natural gas consumption to develop. Academician Huang Wei of the Chinese Academy of Engineering predicts that around 2035, the share of natural gas in total primary energy consumption will increase from about 10% today to 15%.

With the steady increase in market size, combined with the smooth price mechanism described above, the gas business of urban combustion companies can better achieve a virtuous cycle.

However, focusing on the company itself, to do a good job in the gas business, a stable and sufficient gas source is the foundation. It is also the key to guarantee gas supply and reduce business costs.

Hong Kong and China Gas officially established a gas source business division in 2023, setting up gas source trading companies in Shanghai, Guangdong, Hebei, etc., to cooperate with the Shanghai Oil and Gas Trading Center, local resource vendors, and overseas LNG resource providers to coordinate and guarantee the Group's growing gas demand.

As one of the main measures for gas cycle regulation, gas storage facilities are the key for gas merchants to achieve long-term stable supply. By the end of 2023, the Jintan gas storage depot of Zhonghua Gas in Hong Kong had a working gas capacity of 230 million square meters, with full production reserves exceeding 1 billion square meters.

In 2023, Hong Kong and China Gas co-ordinated 3.48 billion square meters of gas volume, accounting for 9.7% of the total gas volume, saving 320 million yuan in costs. As the overall strategy continues to advance, in 2027, the co-ordinated gas volume is expected to account for more than 10% of the Group's total gas volume, saving about 700 million yuan in costs.

Thanks to the huge channel network established by the gas business, Hong Kong and China Gas has launched “gas+” energy businesses such as district heating, commercial energy supply, and residential heating in the mainland, and has also developed extended businesses represented by “famous people” to create a new growth curve for the group.

In 2023, Mingjiya achieved operating income of 4.1 billion yuan and net profit of 490 million yuan.

From a retail perspective, the gas business network itself is a ready-made distribution service channel. Hong Kong China Gas only needs to connect customers within each subsystem through the cloud to connect people, goods, and markets in series without additional fixed cost investment.

Combining its own endowments, the development logic of Hong Kong's Zhonghua Gas “moving from the main gas business to smart kitchens, then extending to safe homes and overall daily consumption” is naturally not difficult to understand.

In the Hong Kong market, the Group's market share of gas appliances and cabinets reached 80% and 30% respectively. The replication of mature market experience to the mainland market is also applicable, and has new connotations. The coverage rates for smart kitchens, home insurance, and home security in the mainland market have reached 10%, 20%, and 6%, respectively.

It is worth mentioning that the State Council recently issued the “Action Plan to Promote Large-scale Equipment Renewal and Consumer Goods Trade-In”, which has opened up room for growth for famous people. According to data from the National Bureau of Statistics, by the end of 2023, China had more than 3 billion units of major household appliances such as refrigerators, washing machines, and air conditioners, and trillion-dollar market space was freed up.

Judging from this, it is not difficult to meet the performance guidelines given by Hong Kong and China Gas to reach 4.6 billion yuan for extended business in 2024.

2. Multiple locations to shape comprehensive energy suppliers

Looking to the future, energy transformation will not be completed by the rise of a single track.

Whether it is fossil energy such as oil and gas, or renewable energy such as wind, light, nuclear, and biomass energy, it is impossible to meet the energy transformation needs of human society alone. The great vision of “3060” requires the joint efforts of multiple green energy industries to achieve it.

In this game of change, if energy suppliers want to reap the dividends of growth as much as possible, they must be like shrewd chess players, able to land as early as possible and lay out ahead of time in order to ensure that they remain on the market board, not only now, but also for decades or even hundreds of years to come.

Hong Kong's Zhonghua Gas knows this.

1) “Distributed photovoltaic+energy carbon service” to create an integrated solution

Distributed photovoltaics can be considered its earliest layout and most mature project in the field of renewable energy. By the end of 2023, distributed photovoltaics had a new contract scale of 1.6 GW, with a cumulative contract scale of 2.96 GW; 1.2 GW was added to the grid, and the cumulative grid connection scale reached 1.8 GW.

Photovoltaic power generation and services have become a new profit growth point for the Group. In 2023, this part of the business turned losses into profit and contributed HK$183 million in profit.

(Data source: company announcement)

Looking closely, the industrial park is the main scenario for the implementation of China Gas's distributed photovoltaic business in Hong Kong, which is not difficult to understand. On the one hand, the Group's huge industrial and commercial gas customers are ready-made resources, and secondary development of user value is conducive to increasing customer stickiness; on the other hand, industrial parks are a key scenario for energy saving and emission reduction as a space carrier for regional economic development and industrial transformation and upgrading.

Moreover, enterprises not only need clean energy supplies, but also have huge demand for derivative processes such as energy use and transactions. For example, energy consumption is reduced through energy saving of air conditioning, smart operation and maintenance, etc., and the value of green assets is increased through carbon trading and carbon management.

To this end, Hong Kong and China Gas also provides customers with a range of energy services to create more new growth points. In 2023, this segment of the business contributed HK$36 million in profit, an increase of 350% over the previous year.

(Data source: company announcement)

2) Laying out hydrogen energy, the ultimate energy solution for the Cardbook century

As a green, low-carbon, and widely used high-efficiency clean energy, hydrogen energy is known as “green oil.” As one of the most likely candidates for the ultimate energy solution of this century, hydrogen energy has broad prospects for development.

The “International Hydrogen Energy Technology and Industry Development Research Report 2023” predicts that global demand for hydrogen energy will exceed 150 million tons in 2030. The International Hydrogen Commission predicts that hydrogen energy will generate more than 2.5 trillion US dollars in market value by 2050.

Despite the large market space for hydrogen energy, storage and transportation are still pain points in the industry, but for Hong Kong and China Gas, this has instead become its advantage.

Generally speaking, Hong Kong's urban fuel network contains about 50% hydrogen and has maintained safe operation for nearly 50 years.

Well, extracting hydrogen directly from pipelines can eliminate large transportation and storage costs. Hong Kong's Zhonghua Gas's first hydrogen project landed at Sai Kung Cricket Ground. The latter extracted hydrogen gas from the former's existing gas network to generate electricity for electric vehicle charging.

Furthermore, the Hong Kong Government is actively promoting hydrogen energy applications, including but not limited to hydrogen buses, hydrogen production from biogas, hydrogen supply in bottles, etc.

As the hydrogen energy leader in the Hong Kong region, Hong Kong China Gas is naturally the main driver in these directions. For example, Hong Kong China Gas cooperated with Citybus's parent company Huida Transportation Service Co., Ltd. (Huida Transportation) to explore hydrogen buses. In February of this year, Hong Kong's first double-decker hydrogen bus officially launched a passenger service.

3) Multi-dimensional layout of the green energy industry

In addition to high-profile industrial opportunities such as photovoltaics and hydrogen energy, Hong Kong's Zhonghua Gas is planning ahead of schedule for some tracks that are relatively niche but actually have huge room for growth.

For example, green methanol, as a clean energy with negative carbon emissions, high energy density, and easy storage and transportation, has a wide range of application scenarios in shipping, chemicals, etc.

According to reports, as of January 2024, the world has ordered more than 200 green methanol ships, and it is estimated that in 2027 there will be a demand for green methanol fuel of about 7 to 8 million tons, but currently only a few companies in the world can produce green methanol on a large scale and meet certification requirements.

Hong Kong's China Gas is one of them. It is also currently the only company in mainland China that mass-produces green methanol certified by the European Union's ISCC. The products meet Europe's requirements for sustainable biofuels and chemical products. Currently, its green methanol production can reach 100,000 tons per year.

Another example is sustainable aviation fuel (SAF). Compared to traditional aviation fuel, SAF can reduce carbon dioxide emissions by 80%. The International Air Transport Association (IATA) predicts that 65% of aviation emissions reduction will be achieved through the use of SAF by 2050.

In view of this, Hong Kong China Gas has established a subsidiary EcoCeres (EcoCeres), which has now grown into one of the largest green aviation fuel suppliers in Asia.

It is undeniable that although the diversified layout helps the Group to seize more growth opportunities, it will inevitably place higher demands on the Group's financial strength and operational capacity.

In order to better balance the relationship between short-term pressure and long-term development, Hong Kong China Gas has adopted an asset-light model of operation, such as introducing strategic partners such as Kerogen Capital and Bain Capital (Bain Capital) for SAF production Easley. J.P. Morgan Chase pointed out in the research report that it is optimistic that Hong Kong and China Gas's renewable energy strategy will shift to an asset-light model, and upgraded its rating from “neutral” to “increase wealth.”

III. Concluding Remarks

In anticipation of “recovering the resonance between consumption and gross margin” in the natural gas market, the certainty of the basic upward growth of Hong Kong and China Gas's gas business should increase at the same time. Combined with its healthy development in the corresponding extension business and renewable energy business, the room for long-term performance growth has been further opened up.

From a valuation perspective, based on the closing price on March 21, the dynamic price-earnings ratio of Hong Kong and China Gas is 19.43 times. This valuation level has fallen to a low level in the historical range of the past ten years.

(Source: ifind)

Performance repair expectations combined with undervaluation levels are a characteristic of a type of target loved by long-term capital. On March 20, Southbound Capital increased its holdings of Hong Kong and China Gas by 12.71 million shares. This also marks that Hong Kong Stock Connect Capital increased its holdings of Hong Kong and China Gas for 7 consecutive days.

Overall, whether in the long term or short term, in terms of business operations or track space, you can feel that the value of Hong Kong's China Gas has not been fully understood. After all, no company has achieved a perfect transformation from a single gas service provider to a comprehensive energy supplier in the strict sense of the word, but this day is probably not far away.