TLG’s FY19 net profit was RMB789mn, up 38.7% YoY, but 15.7% lower than our estimates. Earnings miss was mainly due to 1) township coal to gas connection less than expected; 2) city gas sales GPM declined by 1.3ppt YoY; and 3) city gas sales volume was slightly lower than our estimates. Though FY19 earnings miss estimates, we still find TLG’s overall performance satisfactory as earnings were on track at an accelerating pace during FY17-19. Looking forward, we expect TLG’s earnings growth to turn stable but more sustainable. At 4.9x FY20E P/E, we think valuation has room to catch up peers. We cut TP to HK$7.45, maintain BUY.
- Earnings surged 38.7% YoY. Revenue reached RMB6.5bn, up 28.1% YoY, and gross profit realized RMB1.7bn with GPM declined 1.9ppt YoY to 26.0%. Both figures were lower than our estimates mainly due to lower township coal to gas connection figures and less-than-expected C&I gas sales in 2H19. Dollar margin declined 2.5% YoY to RMB0.55/cbm, which led to a slight squeeze to piped gas sales GPM by 1.3ppt. Major expenses and finance costs maintained good control. Net profit was RMB789mn, up 38.7% YoY. Final dividend would be RMB0.12, boosting payout ratio from 26.7% to 29.4%.
- FY20 guidance: turning to stable growth. After 2-yr’s earnings acceleration backed by township gas connection, mgmt. decides to shift gear to stable growth mode, through 1) stabilizing annual township gas user connection scale to 600k per year, while 2) maintaining active to pursue high quality M&A opportunities, and 3) continue to develop existing project through organic growth. For FY20, mgmt. aims to connect 900k city residential and township households, achieve 12-15% gas sales volume growth, and raise value added service revenue to RMB200mn with a GP contribution of RMB100mn.
- COVID-19 impacts to be mild. Mgmt. sets core earnings growth target at 12-15% in FY20E, which we think is a little bit conservative based on operating guidance. Mgmt. disclosed that gas sales volume declined 6% YoY in 1Q20 due to COVID-19, and gas sales volume has been recovering in Mar. Mgmt. see mild impact for annual gas sales. Given various economy stimulus policies, mgmt. is confident that gas sales growth will resume in the rest of the year.
- Not demanding valuation. Based on updated operating target and considering impacts from COVID-19, we cut 1) township connection by 20/25%, 2) C&I gas sales by 32.3/32.7% in FY20/21E, respectively. As TLG has improving expenses structure and well controlled finance costs, our EPS for FY20/21E revision is trimmed only 7.6%/4.4% respectively to RMB0.97/1.13. We also revise down P/E multiples for city gas business in our SOTP valuation from 15x to 8x to reflects weak market sentiment. We cut TP by 31.1% to HK$7.45. At 4.9x FY20E P/E, valuation has room to catch up peers. Maintain BUY.
