Acquisition of Hefei Gas at high valuation
China Resources Gas announced to acquire 49% stake in Hefei Gas for a total consideration of Rmb4.6bn. The transaction is beneficial to CR Gas as it will solidify its market position in Anhui province, grow CR Gas’ total gas sales volume and market share. However, we reckon the transaction valuation is rather expensive, as it represents FY21 PE of 32x or FY21 PB of 5x. Hefei Gas made profit after tax of Rmb289.7m in FY21, a growth of 25%. Assuming a slower earnings growth of 10% amid COVID lockdown for FY22, the transaction still implies an FY22 PE of 29x, compared with <10x PE of CR Gas.
The transaction will be funded by internal resources. As CR Gas has solid balance sheet and strong cashflow, the transaction will not impose any constraint on its financials. We expect CR Gas to remain in net cash in FY22 after the transaction.
CR Gas’ share price has performed well and went up over 30% since our upgrade in March. We believe this transaction will trigger investors to take profit given the high valuation of the transaction.
Our current rating is BUY with TP of HK$40.00 (under review).