We had a recent update with CGH. Mgmt. disclosed 1Q20 gas sales suffered more severe impacts than previously estimated, with a range of around 10-15%, and FY20 gas sales growth would be dragged to single digit, as a result. Other than that, gas connection, LPG business and value added services were all subject to slight impacts from COVID-19 outbreak. We trim FY20-22E earnings projection by 5.6%/3.9%/4.2% to reflect COVID-19's impact and more conservative expansion outlook. Our TP is also revised down by 12.2% to HK$33.37
- 1Q20 gas sales volume to decline 10-15%. Mgmt. disclosed 2M20 gas volume declined 13% YoY as a results of COVID-19 lockdown in most of China, and expected gas volume in Mar to decline within a range about 10-15%. CGH observed gas volume picking up from late Mar, and in early Apr, mgmt. disclosed gas demand had resume to normal with slight growth. Based on mgmt. update, we trim CGH’s FY20E gas sales growth from 13.5% to 6.3% to reflect impacts from COVID-19.
- Slight drag for residential connection. The Company halted gas construction connection for about four weeks due to virus control measures in China, which had block CGH from fulfilling its 5.5mn residential connection target. Mgmt. expected the final outcome would not deviate too much from the original target, implying only slight impacts. We trim down FY20E connection outlook by 3.2% from 5.57mn household to 5.39mn household as a result.
- Other businesses also suffer mild impacts. As customer contacts were largely blocked during 1Q20, value added services would suffer mild impacts, leading to slower-than-previous-expected revenue and gross profit growth. For LPG distribution, fortunately, CGH was managed to avoid inventory loss from oil price tumble, as the Company adopted sales strategies to mitigate pricing risks, but which also decrease the segment’s profit contribution.
- Investor block trade creates a good entry point. CGH’s key strategic investor, SK E&S chose to cash out its investment through block trade for its 10.25% shareholdings. We think SK E&S’ decision was made based on its own financial pressures, and it creates a good entry point for investing CGH.
- Long term outlook remains intact, maintain BUY. Though we have several downward revisions for CGH’s operating assumptions, we think the Company’s long term outlook remains intact. Our FY20-22E EPS estimates is revised down by only 5.6%/3.9%/4.2% to reflects updates and more conservative assumptions. Our SOTP TP is cut by 12.2% to HK$33.37. Maintain BUY.
