20181205-招商证券_香港_-中国燃气-00384.HK-Post_1HFY19_results_Beijing_and_Taipei_NDR_takeaways_7页_1mb

China Gas (384 HK) Summary

Core Content

China Gas has set a 5-year gas sales volume target of $>50$ bn cu m by FY23, which implies a compound annual growth rate (CAGR) of 22%. This growth is expected to come from three main sources: 10bn cu m from city gas projects in three north-eastern provinces, 10bn cu m from rural residents, and the remaining $>30$ bn cu m from existing gas projects. The company is also aiming for a significant expansion of its value-added services (VAS) business, which is expected to contribute 20% of net profit in FY23.

Main Viewpoints

• Stable Gas Dollar Margin: Management expects a stable gas dollar margin of >RMB0.6/cu m in FY19-20E. This is supported by the fact that 80% of its affected projects have passed through the residential tariff hike and winter cost hike for commercial and industrial (C/I) users. Additionally, more gas supply from upstream players is reducing the need to purchase from the spot LNG market.

• Gas Shortage Mitigation: The gas shortage in the winter of 2018 is less severe than the previous year due to better preparation by upstream players, including storage and price announcements in advance. With the commencement of the China-Russia natural gas pipeline eastern route in late 2019 and the planned far eastern route, the gas supply situation is expected to improve further, which could help increase the dollar margin.

• Connection Fee Stability: The company believes that the cancellation or significant cut of connection fees is unlikely. The current connection fee (RMB2,549/household in 1HFY19) is lower than the government's appraised fee, and management is confident that any regulation will target operators with unreasonable fees rather than China Gas.

• DCF-Based Target Price: The analysts maintain a BUY rating and adjust the DCF-based target price to HK$37.1, reflecting a 30% upside from the current price. The stock is currently trading at a 16.3x FY20 P/E, slightly above its five-year average of 15.4x. The valuation is justified by the company's 21% recurrent EPS CAGR of FY18-20E.

• LPG Business Outlook: The LPG business is expected to improve in 2HFY19 as the company plans to enhance its sales efforts, particularly to industrial and petrochemical users, following the decline in oil prices.

Key Information

• Financial Highlights:

  • Revenue: Projected to grow from HK$31,993 mn in 2017 to HK$98,798 mn in 2021E.
  • Gross Profit: Expected to increase from HK$8,377 mn in 2017 to HK$20,703 mn in 2021E.
  • Net Profit: Anticipated to rise from HK$4,148 mn in 2018 to HK$11,392 mn in 2021E.
  • Core Profit: Projected to grow from HK$4,475 mn in 2018 to HK$11,392 mn in 2021E.
  • Recurring EPS: Expected to increase from HK$0.91 in 2017 to HK$2.14 in 2021E.
  • P/E Ratio: Current FY20 P/E is 16.3x, 0.3-SD above the five-year average of 15.4x.
  • P/B Ratio: Projected to decrease from 7.9x in 2017 to 3.4x in 2021E.
  • Dividend Yield: Expected to rise from 0.9% in 2017 to 2.3% in 2021E.
  • ROE: Expected to remain stable at around 23.4% in 2021E.

• Valuation Adjustments:

  • The analysts revised their DCF-based target price from HK$37.0 to HK$37.1.
  • Adjustments were made due to lower city connection rollout assumptions and higher operating margins, along with RMB depreciation.

• Key Assumptions:

  • The company expects a 25% annual growth in city gas sales volume for FY19.
  • The wholesale gas sales volume is expected to grow at a double-digit rate.
  • The LPG sale tonnage is projected to increase from 4.5 mn tonnes in 1HFY19 to 6.0 mn tonnes in FY21E.
  • The gross profit margin from value-added services is expected to be 40%-50% annually.

• Shareholding Structure:

  • Beijing Enterprises Group holds 24.4% of the shares.
  • China Gas Group Ltd. owns 14.9%.
  • SK E&S Co. Ltd. holds 13.9%.
  • Capital Group Companies Inc. has 7.4%.
  • The total number of shares outstanding is 5,071 mn, with a free float of 1,739 mn.

• Key Downside Risks:

  • Higher-than-expected execution risk for rural connection.
  • Lower-than-expected gas demand.
  • Delayed collection of accounts receivable (A/R) related to rural connections.

• Investment Ratings:

  • Industry Rating: OVERWEIGHT, indicating the sector is expected to outperform the market.
  • Company Rating: BUY, suggesting the stock is expected to generate 10%+ returns over the next 12 months.

Financial Summary

• Balance Sheet:

  • Total assets are projected to grow from HK$60,222 mn in 2017 to HK$127,041 mn in 2021E.
  • Total liabilities are expected to increase from HK$36,275 mn in 2017 to HK$68,364 mn in 2021E.
  • Total net assets are anticipated to rise from HK$23,947 mn in 2017 to HK$58,676 mn in 2021E.
  • BVPS (Book Value per Share) is projected to increase from HK$3.60 in 2017 to HK$8.42 in 2021E.

• Cashflow Statement:

  • Net cash from operations is expected to increase from HK$4,116 mn in 2017 to HK$13,310 mn in 2021E.
  • Net cash from investments is projected to decrease from HK$-4,112 mn in 2017 to HK$-9,657 mn in 2021E.
  • Net cash from financing is expected to vary from HK$-520 mn in 2017 to HK$-4,057 mn in 2021E.
  • Net change in cash is projected to be HK$-516 mn in 2017 to HK$-403 mn in 2021E.

• Profit & Loss Statement:

  • Turnover is expected to increase from HK$31,993 mn in 2017 to HK$98,798 mn in 2021E.
  • Gross profit is projected to grow from HK$8,377 mn in 2017 to HK$20,703 mn in 2021E.
  • Core profit is expected to increase from HK$4,475 mn in 2017 to HK$11,392 mn in 2021E.
  • EBITDA is projected to grow from HK$6,544 mn in 2017 to HK$16,347 mn in 2021E.
  • Basic EPS is expected to increase from HK$0.85 in 2017 to HK$2.14 in 2021E.
  • DPS (Dividend per Share) is projected to rise from HK$0.25 in 2017 to HK$0.64 in 2021E.

• Financial Ratios:

  • Gross margin is expected to decrease from 26.2% in 2017 to 21.0% in 2021E.
  • EBITDA margin is projected to decrease from 20.5% in 2017 to 16.5% in 2021E.
  • Net margin (Core profit) is expected to decrease from 14.0% in 2017 to 11.5% in 2021E.
  • ROE is projected to remain stable at around 23.4% in 2021E.
  • ROIC (Return on Invested Capital) is expected to increase from 12.8% in 2017 to 17.4% in 2021E.

Conclusion

China Gas is positioned to benefit from the expected growth in gas supply and demand, particularly in North China with the commencement of the China-Russia natural gas pipeline. The company's management remains confident in its 5-year gas sales target and its ability to maintain a stable gas dollar margin. Despite some risks, the analysts maintain a BUY rating, citing the company's strong growth prospects and the justified valuation based on its recurrent EPS CAGR and financial performance.