CGH reported 1HFY20 core earnings of HK$5,193mn, up 5.5% YoY. Retail gas volume was up 10.5% to 7.6bcm, while residential connection read only a slight decline of 3.5% YoY to 2.83mn household. Cash flow performance was one of the key highlights in 1HFY20, as free cash flow turned positive and reached ~HK$3.8bn. We think CGH’s outstanding 1HFY20 performance will continue to strengthen market confidence on its future growth. Mgmt. maintained major operating guidance unchanged, and reiterate core earnings growth to reach 15-20% in FY21E. We maintain BUY on CGH with TP unchanged at HK$37.12.
- Outstanding 1HFY20 results. CGH managed to delivered earnings growth of 3.7% though operating environment was extremely challenging due to pandemic impacts. Stripping out non-recurring items, core earnings was HK$5,193mn, up 5.5% YoY. Adding back period FX depreciation, earnings growth could accelerate to 7.8% YoY. The Company declared HK$10 cents interim dividend, flat as last year.
- Retail gas sales to accelerate in 2HFY21. City gas/wholesale gas sales volume increased 10.5%/5.4% YoY to 7,595/5,232mcbm, respectively. Residential gas volume recorded a strong jump by 19.7% YoY, followed by industrial gas volume growth of 9.8%. Commercial gas was in a relatively sluggish recovery pace due to pandemic control. Looking ahead in 2HFY21, mgmt. expect gas sales volume growth to reach above 1.7bcm, through 1) 0.7bcm contribution from new CTG users; 2) 0.3bcm from NE China market; and 3) 0.7-0.9bcm organic gas volume growth from existing projects. We think CGH has high visibility to reach its 15% city gas volume growth.
- Shifting residential connection structure. CGH adjusted CTG connection pace due to its cash flow drag impacts caused by receivable collection delay. 1HFY20 township connection declined 42.5% YoY to 0.7mn household only, but largely offset by city residential connection growth of 23.7% to 2.1mn household. We are not too concerned about the structural change, as mgmt. confirmed LPG Smart Micro Grid projects in Southeast China would replace CTG projects in Northern China, with lighter investments and significant better cash flow performance. CGH maintained FY21E residential connection at 5.5-6.0mn households.
- VAS maintained strong momentum. VAS revenue surged 53.1% YoY to HK$3.38bn, with GP surging even faster at 65.4% to HK$1.36bn. The segment contributed HK$1bn operating profit to CGH, accounting for 15.6% of the total OP of the Company. In terms of residential user value development, we estimate 1HFY21 ARPU of HK$89.1, up 31.6% YoY.
- Free cash flow turned positive. Free cash flow read HK$3.8bn during 1HFY21, driven by strong operating cash flow growth of HK$2.6bn and CAPEX declined from less PPE and M&A investment. CTG receivables were collected at HK$3.45bn in 1HFY20 (vs. HK$4.9bn in FY20). As CGH had another 1.5mn households ignited piped gas operation, mgmt. maintained full year CTG receivable collection of HK$8-9bn unchanged with high confidence. Supported by strong cash flow performance in 1HFY21 and accelerating receivable collections, we think it won’t be difficult to maintain positive free cash flow for FY21E, and we expect that will boost market sentiment on CGH.
- Earnings revision. Based on 1HFY21 performance, we trim CGH’s FY21 EPS slightly by 0.5%. Since CGH had retail gas dollar margin expanded by RMB3cent/cbm, in an abundant gas supply environment, we lift CGH’s future gas dollar margin outlook. Our FY22/23E EPS projection is lifted by 4.1/4.2% respectively to HK$2.52/2.91 respectively.
- Re-rating to continue. The Company has experienced continued share price decline due to cash flow performance and gas sales volume concerns since FY20 results announcement. We think market sentiment has been improving on economic and social activities recovery from Oct, and we think strongly improved cash flow will further strengthen market sentiment on CGH. The Company is currently trading at 13.7x/11.1x FY21/22E PER, significantly lower than peers. We expect the recent re-rating trend to continue with CGH. Maintain BUY with DCF based TP unchanged at HK$37.12. Our TP reflects 18.2/14.7x FY21/22E PER.
