20181127-招商证券_香港_-中国燃气-00384.HK-Prospect_looks_intact_8页_1mb

China Gas (384 HK) Summary

Core Content

China Gas (384 HK) reported strong performance in the first half of FY19 (1HFY19), with recurrent profit rising by 22% YoY to HK$4.0bn, exceeding expectations. The company maintained its BUY rating and target price at HK$37.0, with shares trading at 15.2x FY20E P/E, which is considered justified based on a 20% recurrent EPS CAGR from FY18 to FY20E, outperforming its peers.

Key Financial Highlights

• Recurrent Profit: Increased by 22% YoY to HK$4.0bn.
• Recurring EPS: Rose to HK$0.84, with a CAGR of 20% for FY18 to FY20E.
• Core P/E: Traded at 15.2x FY20E, close to its five-year average.
• Dividend Yield: Increased to 2.0% in FY20E.
• ROE: Maintained at 23.5% in FY20E.
• Net Debt / Equity: Reduced from 87.9% in FY18 to 46.9% in FY21E.

Main Business Performance

• Piped Gas Sales Volume: Grew by 33% YoY in 1HFY19, with city and rural gas up 28% and 40%, respectively.
• Residential Users Growth: Increased by 21% YoY.
• C/I Users Growth: Grew by 24-38% YoY.
• LPG Sales: Increased by 45.7% YoY, driven by higher oil prices.
• Gas Connection Growth: 1.4mn new city connections and 1.1mn rural connections, with a total of 2.5mn new households connected in 1HFY19.

Management Guidance

• Gas Dollar Margin: Revised up to RMB0.62/cu m for FY19E, up from RMB0.6/cu m, due to cost pass-through to C/I users.
• Full Year Sales Growth: Management forecasts a >25% YoY growth in city gas sales, the highest among its peers.
• Rural Connection Growth: Confident to achieve 2mn rural connections in FY19E.
• Capex Guidance: Full year capex forecast at HK$9-10bn, with allocations to city, rural, LPG, and LNG projects.

Key Risks

• Execution Risk in Rural Connection: Potential delays in rural expansion.
• Gas Demand: Lower-than-expected gas demand could impact performance.
• Cost Pass-Through: Failure to pass through increased gas costs to end-users during winter.

Financial Summary

• Revenue Growth: Expected to grow from HK$31,993mn in 2017 to HK$103,687mn in 2021E.
• Gross Profit: Projected to increase from HK$8,377mn to HK$21,738mn.
• Net Profit: Projected to rise from HK$4,148mn to HK$11,393mn.
• BVPS (Book Value Per Share): Projected to increase from HK$3.60 to HK$8.39.

Investment Outlook

• DCF Target Price: HK$37.0, implying a 35% potential upside from the current price.
• Valuation Justification: Based on strong recurring EPS growth and the company's strategic position in the gas sector.
• Industry Rating: OVERWEIGHT, indicating a positive outlook for the sector.

Shareholding and Liquidity

• Shareholding Structure: Includes major shareholders such as Beijing Enterprises Group (24.4%), China Gas Group Ltd. (14.9%), and SK E&S Co. Ltd. (13.9%).
• Free Float: 1,739mn shares.
• Market Cap: HK$138,705mn as of 2018.
• Avg. Daily Volume: 4.74mn shares.

Strategic Developments

• Rural Connection Business: On track with 5.5mn rural residents signed for contracts.
• Russian Gas Access: Anticipated significant growth in gas sales in three north-eastern provinces once Russian gas is accessible.
• Value-Added Services (VAS): Revenue up 45% in 1HFY19, with management maintaining a 40-50% gross profit growth forecast for FY19E.

Financial Ratios

• Gross Margin: Declined from 26.2% to 22.5%.
• Operating Margin: Declined from 20.2% to 18.7%.
• Net Margin: Declined from 16.3% to 14.6%.
• EBITDA Margin: Declined from 20.5% to 16.5%.
• ROE: Maintained at 23.5% in FY21E.
• ROIC: Expected to rise from 12.8% to 16.4% by FY21E.

Conclusion

China Gas is showing robust performance with strong growth in gas sales and rural connection, and management has revised up its gas dollar margin guidance. The company's valuation is considered justified given its strong EPS growth and strategic position in the gas sector. The BUY rating and target price remain unchanged, indicating confidence in its future performance.