[Results analysis]: good progress in smart energy
- FY21 net profit growth of 11% was below our expectation due to lower dollar margin and absence of contribution from Shanghai Gas
- Expect low-teen organic growth in gas sales volume with further pressure on dollar margin
- Good progress in rooftop solar business with 1GW installation in FY22
- Maintain BUY for its good progress in smart energy business; TP is lowered to HK$5.90 to reflect lower dollar margin
Towngas Smart Energy (TSEL) reported a 13% decline in net profit to HK$1.25bn for FY21. However, stripping out one-off items (such as the loss from the change in the fair value of the embedded derivative component of convertible bonds), net profit climbed 11% to HK$1.61bn, below our expectation. This was due to a lower-than-expected dollar margin of Rmb0.51/m3 and the absence of contribution from Shanghai Gas. The final dividend was maintained at HK$0.15 per share, the same as FY20.
As the natural gas pricing mechanism of Shanghai Gas will be refined in 2022, the transition period of the deal with Shanghai Gas was extended and TSEL will share Shanghai Gas’ profit starting from 1 January 2022.
2022 will be a challenging year for gas distributors. Downward pressure on economic growth and the preventive measures for COVID are expected to slow down organic growth of gas sales volumes to the low teens in FY22. With the contribution from Shanghai Gas, which is expected to achieve a sales volume of 9bn m3, growth in total gas volume will jump to >70%.
Another challenge is the dollar margin. The Ukraine crisis has boosted LNG prices, which are expected to stay high this year. Global decarbonisation efforts have also tightened the overall supply of natural gas. We also expect the three oil majors to charge higher for gas supply, even in the off-peak season. Although TSEL has a mechanism in passing on the cost hike, the time lag in the process will put pressure on the dollar margin. To alleviate the margin pressure, TSEL has signed long term contract for supply of LNG of 1m tons with another 1m tons of long term contract under negotiation. It will also increase the supply of non-conventional gas from the domestic market as well as increase gas storage volume in Jintan. Nevertheless, we have lowered our dollar margin assumptions to Rmb0.48/m3, from Rmb0.545/m3. But we expect dollar margin to rebound back to Rmb0.51/m3 in FY23 after passing through cost hike.
On a positive note, TSEL’s new smart energy business is progressing well. After securing 32 zero-carbon industrial parks, it targets to add 50 more to its portfolio. TSEL will start the installation of 300MW of rooftop solar power in these industrial parks in 2Q and set 1GW as the target in FY22. The target is slightly lower than our projection of 1.5GW, but we believe this installation will accelerate the achievement of TSEL’s installation target of 8GW by FY25. We estimate revenue from this business line to increase 75% in FY23, accounting for 6% of total revenue. The long term target of new smart energy business accounting for 50% of total revenue remains intact.
Growth in extended business is also expected to be robust at 40%, thanks to the enlarged customer base after acquisition of Shanghai Gas and broadened product range.
In view of large capex for the development of its smart energy business, net debt-equity ratio is expected to climb to >70% in FY23. Management is exploring different ways to finance the development. Apart from internal resources and bank loans, other options under consideration include equity financing and seeking partners for joint development at project level.
To reflect the above changes in assumptions, we have lowered our FY22/23 earnings estimates by 29-35%. After the revision, adjusted earnings (stripping out one-off items) is expected to increase 4% and 18% in FY22 and FY23 respectively.
Given the strong growth potential of the smart energy business, we have changed our valuation method from DCF to PE multiples. Our new TP of HK$5.90 is based on 12.5x 12-month rolling PE which is equivalent to +1SD from 5-year historical average. We maintain our BUY rating as the recent share price correction of >40% has already reflected the challenges in gas business. The good progress in smart energy will transform TSEL into an integrated energy play.