Zhi Tong Cai Jing·2026-01-08 07:09Core Viewpoint - Daiwa has upgraded the rating of Hong Kong and China Gas (00003) from "Hold" to "Outperform" based on higher free cash flow forecasts and has raised the 12-month target price from HKD 7.1 to HKD 7.7 using a sum-of-the-parts valuation method [1] Group 1: Financial Projections - Earnings per share (EPS) forecasts for 2025 to 2026 have been increased by 2% due to revised profit expectations for gas and green fuel businesses [1] - The company is expected to maintain its dividend commitment, with a projected annual dividend of HKD 0.35 per share in 2025, yielding approximately 4.9% [1] Group 2: Business Performance - The recovery in profitability from the green fuel business is anticipated to improve the fundamentals of Hong Kong and China Gas, alongside potential spin-off of Eco Ceres post-2026, which could enhance dividend payouts [1] - The net profit for the first half of last year was negatively impacted by a net loss of RMB 130 million from Eco Ceres, primarily due to weak prices of sustainable aviation fuel (SAF) [1] - A turnaround to profitability is expected in the second half of 2025, driven by rising prices of sustainable aviation fuel and new production capacity [1] Group 3: Market Conditions - The green fuel business is projected to experience a turnaround as sustainable aviation fuel prices increased in the second half of last year, with steady growth anticipated in the first half of this year due to a low base from the previous year [1]