TLG announced to acquire two city gas project in Jingyuan County and Datong/Huzhu County with total consideration of RMB1,066mn on 27 Dec 2020. Both projects are in Gansu Province, and has considerable population and gas sales volume. Acquisition valuation was 19.3x FY19 PER and 2.1x PBR based on book value by Jul 2020. It looked a bit expensive at first glance, but mgmt. explained the valuation can be justified based on 1) visible gas sales potential; 2) newly developed residential gas connection; and 3) synergies from operating costs saving and regional township connection projects. We estimate new projects to contribute ~RMB40mn earnings to TLG in 2021E. Reiterate BUY with TP unchanged at HK$8.31.
- Robust project growth potential. According to mgmt., target projects has ~1mn population and realized 180mcbm gas sales in 2019. TLG expected both projects to have rapid C&I gas volume growth from local industrial park projects as well as industrial migration from Lanzhou and Baiyin City. Mgmt. also thought both projects aggregately have considerable residential connection potential from city residential and township projects for more than 60-70k households. Moreover, both projects had finished major pipeline investments, and are making positive free cash flow. Therefore, TLG thought the valuation was justified, and mgmt. expected the acquisitions to generate equity IRR above 12%.
- Synergies from costs saving and township connection. Mgmt. expected to boost projects earnings through costs saving measures, since target projects has SD&A ratio at ~9%, which was significantly higher than TLG’s 4% level. Other than that, we also expect further synergies from the acquisition, as the Company aim to develop more township gas connection business in Gansu provinces.
- Funding from internal resources. For the RMB1bn acquisition funding, TLG plans to have 60-70% debt financing, and the remaining from internal resources. Based on our cash flow projection, we think TLG has no pressure for preparing those acquisition funding. Mgmt. also expected gearing to remain stable, and emphasized the acquisition will have no impact to coming dividend pay-out.
- On track to our earnings projection. Based on consolidation assumption of 9 months for newly acquired projects, we expect both projects sum up to contribute RMB40mn earnings in 9 months to TLG in 2021E, on track to our earnings projection. We think the acquisition continues to boost market confidence on TLG’s sustainable earnings growth. TLG’s share price has rebounded 12.7% since our last update in Dec 2020. We think market has realized TLG’s value and we expect re-rating to continue. Reiterate BUY with TP unchanged at HK$8.31.
