EUR 850.00 For Business Accounts Only

Morningstar | China Gas Holdings’ FY2019 Results Within Expectation; FVE Raised On Positive Outlook

Narrow-moat China Gas Holdings, or CGH, reported fiscal 2019 (ending March) net profit of HKD 8.22 billion, up 35% year over year. Stripping out one-off items of HKD 73 million, the earnings were in line with our expectation. After fine-tuning and rolling forward our valuation model, our fair value estimate is increased to HKD 33.50 from HKD 30.00. While we think the company’s strong growth outlook is mostly priced into the current share price, we would be a buyer of the stock on any price pullback. The firm has proposed to revise up the exercise conditions for its share option scheme to HKD 14 billion and HKD 15 billion net profit for fiscal 2022-23 from HKD 12 billion and HKD 13 billion, respectively. Although we do not expect this to be achieved in our base-case scenario, this provides sufficient long-term incentive to management to drive for further growth.

Total natural gas sales volume excluding wholesale operation rose 25.1% year over year, underpinned by strong demand growth across all segments except for refilling stations due to increasing usage of clean energy vehicles in China. In particular, new residential connections of 5.1 million beat our expectation on the back of better than expected growth from rural city gas projects in North China. Management is keeping its targets of 5.5 million and 6.3 million new residential connections unchanged for fiscal 2020 and 2021, respectively. In addition, they maintain guidance of more than 25% annual volume growth for retail segments for fiscal 2020-21. We believe these targets are achievable given strong government policy support and CGH’s execution track record. As of March 31, the firm has cumulatively signed new contracts with more than 7 million households for replacement of coal with gas projects (including 3.54 million households already connected), providing visibility for further growth.

We note that CGH’s gross margin improved to 23.7% from 22.1% a year ago, recovering from higher procurement cost incurred last winter as a result of the gas shortage.
The LPG segment was below expectation with core net profit declining 81.5% year over year, as net margin dropped to 0.6% from 3.4% a year ago, largely due to inventory losses as a result of a sharp fall in oil prices in the fourth quarter of 2018. We expect the LPG business to recover going forward. Besides, the firm has reduced its LPG sales volume target to 4.3 million tonnes and 5 million tons for fiscal 2020-21, from 5 million and 6 million respectively, to control the exposure to this segment.

On a positive note, operating profit for the value-added services segment (such as sales of insurance and appliances) grew 47.8% year over year. We believe this segment will remain as earnings growth driver going forward as this business will benefit from abundant cross-selling opportunities, taking advantage of the group’s more than 35 million customer base.