TLG delivered resilient 1H20 results. Core earnings stripping out FX impact increased 3.5% YoY to RMB424mn. The resilient performance was driven by stable connection (139k households) and expanded gas dollar margin (+RMB2 cents/cbm) during 1H20. Cash flow performance was also impressive with RMB260mn free cash inflow and well controlled township connection receivables collection. We trim FY20-22E EPS forecast by 3.8-6.6% based on guidance update and more conservative assumptions. At FY20/21E 6.2/5.3x PER, we see valuation undemanding with attractive dividend yield (FY20E:4.9%). Maintain BUY with TP unchanged at HK$7.45.
- Resilient 1H20 performance. Gas sales volume declined 3.6% YoY, dragged by 0.9%/25.4% decline in C&I/wholesale gas, but largely offset by 16.2%/4.0% increase in residential and vehicle gas volume. Overall gas sales leaned to higher margin business, which boosted gas dollar margin by RMB2 cents/cbm. Residential connection remained stable at 379k households (city/township at 139k/240k), down 2.9% only, significantly outperforming peers connection. Major expenses maintained well control with interest costs declined 5.4%. Net profit was RMB375mn, down 7.4% YoY. If stripping out FX losses and non-recurring items, core profit was RMB424mn, up 3.5% YoY. TLG declared interim dividend of RBM0.114 per share, representing 30.4% 1H20 payout ratio.
- Impressive cash flow performance. TLG recorded RMB260mn free cash in 1H20, continuing its good cash flow performance from 2H19. Strong cash flow was mainly driven by township connection receivables, as the Company collected RMB318mn in 1H20, and received another RMB366mn in Aug. Since Yuzi Fund has sufficient funding support, TLG expects to collect RMB1.3-1.5bn township related receivable, well enough to cover CAPEX budget of RMB1bn in 2020. We expect TLG’s free cash flow to remain strong in 2H20.
- Mgmt. trimmed FY20 guidance. Mgmt. revised FY20 guidance in view of uncertainties with COVID-19, including 1) gas volume growth from 12-15% to 10%; and 2) core earnings growth from 12-15% to 10%, while maintaining 900k households and dividend payout ratio at 29% unchanged. On the back of improving gas sales structure, TLG also expects gas dollar margin to expand slightly on a YoY basis. Based on expanding dollar margin and stable connection outlook, we think it will be easy for TLG to achieve the earnings goal.
- Undemanding valuation with attractive yield. We saw qualitative improvement following TLG’s several half year results from 2H18. Strong cash flow performance and stable earnings release had proved TLG’s sustainable growth. Trading at FY20/21E 6.2/5.3x PER, we see valuation undemanding and offering attractive dividend yield at FY20E 4.9%. Maintain BUY with TP unchanged at HK$7.45. Our TP reflects FY20/21E PER of 7.4/6.4x.
