We had a recent update with TLG. According to mgmt., in Apr and May, gas sales volume increased 15% and 10% YoY respectively, gradually getting out of the impacts from the epidemic. 5M20 gas sales increased 2.5% YoY. Other than gas sales growth recovery, we think TLG still has two highlights from realizing project M&A, and reducing financial costs through successful refinancing in low interest rate environment. At 5.5x FY20E PER, TLG’s valuation is substantially lagging behind peers. Based on stable earnings growth outlook, we believe TLG deserves a re-rating. Maintain BUY with TP unchanged at HK$7.45.
- Gas sales resumed growing pace. According to our channel check, gas sales volume in Jan-May increased 2.5% YoY, led by significant gas sales growth recovery in Apr and May with gas sales volume surged 15% and 10% YoY respectively. In TLG’s business territory, the growth was mainly sourced from industrial gas consumption, and mgmt. also mentioned that commercial gas consumption had also turned positive in Apr. We anticipated that ~80% of gas volume increment was driven by organic growth from development of old projects, while M&A projects contributed for the remaining 20%. TLG maintained FY20 gas sales growth guidance at 12-15%.
- Residential gas connection largely in line. COVID-19 had brought some residential connection project delay in 1Q20, but TLG maintained its annual residential connection target unchanged, including 300k city residential connections and 600k township coal to gas connections. In view of the impacts from project delay, we trim our city residential connection by 3.5% to 287k, while we think TLG should have some buffer from its contract assets carried forward from township connections in 2019. We think overall impact on residential connection will be mild.
- Highlights from project M&A and costs reduction in refinancing. TLG acquired Shenqiu project in Jan with consideration of RMB280mn. We expect there are several new acquisition targets on the pipeline, and the Company to close some within the year. Each new project acquisition could bring more than 20mcbm gas sales and considerable rooms for new residential and C&I connection. For financing costs reduction, TLG had refinanced US$70mn in Jan at LIBOR+280bps, and mgmt. planed to have more US$ borrowing refinancing within the year. We expect TLG’s overall financing costs to be reduced by 40bps in 2020, which could compensate for the residential connection delay.
- Valuation still lagging behind. We expect TLG’s earnings performance to be resilient given uncertain market environment caused by COVID-19. Our EPS estimates in 2020-22E are largely unchanged. We believe TLG deserves a re-rating, and maintain TP at HK$7.45 unchanged. Maintain BUY.
