HK & CHINA GAS(00003) 申万宏源·2024-12-01 08:02Investment Rating - The report initiates coverage with a "Buy" rating for Hong Kong and China Gas (00003) [1] Core Views - The company is a leading national city gas enterprise with a stable gas sales structure and high-quality city gas projects [1] - The Hong Kong business has stable profitability with potential for further price increases [1] - The mainland business is experiencing steady growth in gas sales volume and improving gross margins [1] - The company is diversifying into renewable energy and sustainable energy sectors, which are expected to drive future growth [1] Business Overview Hong Kong Business - The Hong Kong gas market is mature with stable user growth, covering 75% of the market [1] - Residential and commercial gas sales dominate, with residential gas sales accounting for 54% and commercial for 40% in 2023 [1] - The company has strong pricing autonomy in Hong Kong, with recent price adjustments in August 2024 [1] - Gas sales volume in Hong Kong is expected to increase by 7% by the end of 2028 compared to 2023 [1] Mainland Business - The company operates 321 city gas projects across 29 provinces in mainland China, with a user base exceeding 40 million [1] - Gas sales volume in mainland China grew at a CAGR of 8.56% from 2018 to 2023 [1] - Industrial gas sales account for 45% of total gas sales, followed by residential (22%) and commercial (14%) [1] - The gross margin for gas sales in mainland China improved to 0.47 yuan/m³ in 1H24, up by 0.05 yuan/m³ year-on-year [1] Diversified Business - The company is expanding into renewable energy, including distributed photovoltaic and energy-carbon services [1] - In 1H24, the renewable energy business contributed 1.9 billion HKD in profit, with Hong Kong and mainland businesses contributing 1.4 billion HKD and 0.5 billion HKD respectively [1] - The company is also exploring sustainable aviation fuel, green methanol, and hydrogenated vegetable oil production [1] Financial Projections - The report forecasts net profit attributable to shareholders of 6.207 billion HKD, 6.713 billion HKD, and 7.094 billion HKD for 2024, 2025, and 2026 respectively [1] - EPS is projected to be 0.33 HKD, 0.36 HKD, and 0.38 HKD for the same periods [1] - The target price is set at 7.77 HKD, representing a 31.7% upside from the current price [1] Valuation - The company's valuation is supported by its stable dividend policy, with a long-standing dividend of 0.35 HKD per share annually [1] - The DCF valuation model suggests significant upside potential as the company's cash flow grows and the city gas industry stabilizes [1]