<Results Alert>: A good bargain (Upgrade to BUY)
- 2% growth in FY21 core profit was below expectations due to lower dollar margin
- Gas volume growth target of >20% in FY22, among the highest for gas distributors
- Target to install 1GW of rooftop solar power by 2025
- Upgrade to BUY as most negatives are priced in; TP set at HK$7.40
Too cheap to ignore
Tian Lun Gas reported a 2% increase in FY21 core profit to Rmb915m, behind of our estimate of 11% growth. The major reason was lower than expected dollar margin of Rmb0.49/cm (our estimate: Rmb0.53/cm). Turnover increased 18.8% to Rmb7.65bn, ahead of our estimated Rmb7.5bn. In particular, performance of value added services were encouraging with robust growth of 95% and 56% in turnover and gross profit respectively. Gas volume growth of 29% was also above expectation. The number of new connections was less than expected, particularly for rural coal-to-gas business due to delay in construction amid serious flooding in Henan. Net debt-equity ratio jumped from around 69% in FY20 to 96% in FY21. Final DPS of Rmb0.1457 was declared with total payout ratio up by 1ppt to 31%.
Despite challenges from weak economic growth in China and dollar margin pressure from high LNG prices, Tian Lun Gas gave a relatively optimistic guidance for FY22, in our view. Firstly, Tian Lun Gas expects gas volume growth of 20-25% in FY22, which is the highest amongst gas distributors under our coverage. We reckon the target is achievable because it has been actively acquiring more customers, with the customer base growing at 30% and 17% in FY20 and FY21 respectively. We believe its strong market presence in Henan rural township areas will allow Tian Lun Gas to enlarge its customer base by >10% going forward. In addition, Tian Lun Gas has focused on securing industrial and commercial (I&C) users, offering integrated energy solutions. This has increased gas volume growth from I&C users. In fact, overall gas volume growth in 2M2022 was strong at >20% and bodes well for the company to achieve its target. We project gas volume growth of 20-21% in FY22/23.
Second, Tian Lun Gas expects dollar margin to decline marginally despite the current high LNG prices. This is achieved through improvement in the cost pass-through mechanism, diversified procurement sources and higher gas volume from I&C users. In addition, cost pass-through has completed for I&C users and the positive impact will be reflected but partly offset by negative impact from high LNG prices in FY22. To be conservative, we have assumed dollar margin to go down by >Rmb0.02/cm to below Rmb0.47/cm.
The LNG price is the key factor affecting Tian Lun Gas’ dollar margin. While the Ukraine crisis is the major uncertainty on LNG prices, there are a few positive signs. First, Asian spot LNG prices fell recently as concerns over disruptions of Russian gas have slightly eased. Second, China’s winter season is coming to an end and demand will be muted. In fact, LNG consumption in North-east Asia only accounted for 54% of global LNG imports in the first two months of 2022, compared with 67% in 2021. In addition, according to data recently released by PipeChina, spare LNG receiving capacity at its seven LNG terminals was around 10m tons for April to December 2022, which is equivalent to around 49% of its capacity. This figure is higher than that released in February, indicating cancellation of bookings due to lack of demand. All these indicate that the current high LNG price of over Rmb8,000/ton may not be sustainable. A downtrend will be a positive catalyst to Tian Lun Gas’ share price.
In addition, Tian Lun Gas’ strong market presence and large customer base in rural county areas in Henan bodes well for the development of its low carbon operation. With a target of installing 1GW of rooftop solar power by 2025, it has already commenced construction of its first pilot project in Shilin Town, Hebi. It targets to achieve 20MW of operating capacity, 80-100MW under construction and secure new orders of 300MW in the project pipeline. If these materialize, we estimate the above will bring in EPC revenue of around Rmb410m and Rmb800m with an installation of 100MW and 250MW in FY22/23 respectively. We have yet to factor in revenue from O&M which will be upside risk on our estimates.
Tian Lun Gas’ share price has corrected as much as 42% since our downgrade in August 21. Currently, the counter trades at 5x FY22 PE which is around -2SD from its 5-year historical average. Such valuation is also close to the previous trough in March 20. Thus, we believe most negatives have been reflected. With a higher dividend payout ratio, the counter now offers an attractive yield of almost 7%. We upgrade our rating to BUY with TP of HK$7.40 which is based on 0.95x PEG. The TP also implies 6.7x FY22 PE which is equivalent to -0.5SD of its 5-year historical average to reflect the Ukraine crisis risk.