[Results analysis] Upside surprise in dollar margin in 1H22
- 1HFY22 core earnings decline >30% to around HK$520m, below our expectation, due to lower-than-expected contribution from associated companies and JVs
- Upside surprise in dollar margin at Rmb0.50/cm in 1HFY22; raise our FY22 assumption by Rmb0.04/cm to Rmb0.50/cm
- Good progress in recovery of gas volume growth
- Slight delay in connection of 1GW of rooftop PV will not have significant impact on its long term decarbonization plan
- BUY rating and TP of HK$4.80 remain intact
Towngas Smart Energy (TSE) (1083 HK) reported net profit of HK$1,041.6m for 1HFY22, up 33.8%. However, stripping out change in fair value of embedded derivative component of CB, core profit was around HK$520m, a decline of >30%. The drop was slightly higher than expected due to lower-than-expected contribution from associated companies and JVs. Gas volume growth of 4.9% was in line but dollar margin of Rmb0.50/cm was better than our expectation. In particular, dollar margin improved from Rmb0.45/cm in 1QFY22 to Rmb0.55/cm in 2QFY22. In 1HFY22, development progress of rooftop PV was on track with 0.38GW of capacity under construction / grid connected. In addition, there are 0.4GW in the pipeline. TSE did not declare any interim dividend (same as last year).
Management’s targets in city gas operation (i.e. gas volume growth of 8-10% and dollar margin of Rmb0.51-0.52/cm) remain unchanged. These will be achieved through several initiatives. First, around 40% of residential users have already achieved cost pass-through and the remaining will be done in the coming few months. Apart from getting higher contracted gas volume from three oil majors than last year, TSE is broadening its gas source to stabilize gas cost, including unconventional gas and direct sourcing of LNG. In 2HFY22, TSE will start LNG import through Caofeidian LNG Terminal of Shanghai Gas. Hence, the uptrend in dollar margin is expected to continue, from Rmb0.48/cm in 2HFY21 to Rmb0.50/cm in 1HFY22 and further to >Rmb0.55 in 3QFY22. Nevertheless, we see high risk in dollar margin during winter with extreme weather and have conservatively assumed a lower dollar margin in 4Q, giving a full year assumption of Rmb0.50/cm (up from our previous assumption of Rmb0.46/cm). Management is seeing improving trend in gas volume growth from the trough in 2Q and is optimistic to have a stronger growth of low double digit in 2H. Nevertheless, COVID restrictions by government will be a major swing factor and we have conservatively assumed a 9.6% growth in 2H, giving 7.2% for the full year (trimmed from 8.2% previously).
With module prices staying at high level and COVID measures restricting traveling, a slight delay in achieving management’s target of connecting 1GW of rooftop PV by 2-3 months is expected. In addition, TSE will add another 1GW of contracted capacity into the project pipeline in 2H. This should bode well for higher installation in FY23. Although module prices are high, TSE can still maintain its project return by lowering overhead expenses, offering less discount to customers and improving efficiency in power generation. In addition, TSE has already launched smart platform for value added services (including carbon management and green power trading) for 2 industrial parks. Success in these pilot projects will help rapid development going forward.
All-in, we have fine-tuned our earnings estimate. We maintain our BUY rating with TP remains unchanged at HK$4.80. We continue to like TSE for its good visibility in smart energy business, rebound in dollar margin and improving ESG performance.