Acquisition of a gas project at 20x FY21 PE
- Towngas Smart Energy (TSE) to acquire 49% of Anguo Huagang project at 20x FY21 PE or 1.38x FY21 PB
- We reckon the acquisition price is rather high
- Nevertheless, the deal offers business opportunities in low carbon operation for TSE
- Our current rating is BUY with TP of HK$5.90
Towngas Smart Energy (TSE) announced to acquire 49% of Anguo Huagang at a consideration of Rmb23m, representing a FY21 PE of around 20x or 1.38x FY21 PB. TSE will finance the transaction by internal resources and the deal will not have a material impact on TSE’s balance sheet and income statement. Note that Anguo Huagang is 51% owned by an associate of TSE’s parent company, HKCG. Thus, the deal is a connected transaction.
Anguo Huagang is mainly engaged in the sales of pipeline natural gas in Anguo City with FY21 PAT of Rmb2.4m (up from Rmb0.24m in FY20). Apart from the steady growth in gas volume along with sustainable development of Anguo City, Anguo Huagang also has a stable and diversified pipeline gas source and can offer business opportunities in zero carbon parks, rooftop PV operation and integrated energy business to TSE. These low carbon businesses are TSE’s focus operations for decarbonization.
We reckon the acquisition price is rather high. Given a weak economic growth in China in 1H, we reckon overall gas volume growth to be <10% in China. Even if we aggressively assume Anguo Huagang to have 50% earnings growth in FY22, the acquisition price would still imply a FY22 PE of 13x, higher than TSE’s current valuation of 8.5x. Nevertheless, acquisition of Anguo Huagang has strategic value for TSE in low carbon operation. Our current rating is BUY with TP of HK$5.90.