China Resources Gas’ Results Below Expectation; Recovery Expected in 2023

Narrow-moat China Resources Gas’ 01193 2022 net profit of HKD 4.7 billion, down 26% year on year, was below our expectation. This was mainly attributable to higher operating costs and lower contribution from joint ventures. We lower our fair value estimate to HKD 33.50 from HKD 39 to factor in the disappointment. We think the firm is fairly valued currently as we believe negative concerns have been largely priced in. CRG is trading at around 11 times forward P/E, the lower end of its five-year historical trading range of around 7-19 times. Despite the weaker earnings, CRG’s payout ratio was increased to 50% in 2022 from 45% in 2021, implying a decent estimated 2023 dividend yield of more than 4%.

In 2022, CRG’s natural gas sales volume rose 5.3% year over year, trailing guidance of 8% to 10%. The firm’s dollar margin per cubic meter decreased to CNY 0.45, behind the target of CNY 0.50 due to rising energy costs. However, new residential connections figure of 4.1 million was better than guidance of around 3.2 million to 3.5 million. Management is optimistic about the outlook in 2023 and expects joint ventures’ results to improve due to compensation from government, although the timing for this is uncertain.

In 2023, CRG guides for double-digit gas sales volume growth and a dollar margin of CNY 0.50. This is in line with ENN Energy, which expects retail gas sales volume growth of about 10% in 2023 and dollar margin of CNY 0.50. Although CRG’s 2023 new residential connections figure of 3.5 million was lower than 2022′s 4.1 million, we think this is still one of the highest among peers. We expect CRG’s new residential connections to stay above 3 million in the next five years.

CRG’s comprehensive services business continued to deliver robust revenue growth of 42.5% year on year to HKD 3.2 billion in 2022 (about 3.4% of total revenue), underpinned by strong gas appliances and insurance sales.