Light Asset Operations Boost HKNG Energy's Investment Value

In the face of the severe challenges posed by global climate change, the international community has reached a universal consensus: actively promoting the green and low-carbon transformation of the economy and society to achieve sustainable development. The core of this transformation is the vigorous development of clean energy. Among them, natural gas, with its high calorific value and relatively low carbon emission characteristics, is gradually becoming a key energy in this transformation process.

The "China Natural Gas Development Report (2024)" recently released by the National Energy Administration pointed out that in the first half of this year, the national natural gas consumption volume was 210.8 billion cubic meters, a year-on-year increase of 8.7%. Looking forward to the second half of the year, although there are many uncertain factors in the international environment, China's macro economy will continue to rebound and improve, and the demand for natural gas will grow rapidly, which undoubtedly contains huge commercial space. If we follow the clues, there are undoubtedly great investment opportunities in the natural gas industry represented by the city gas industry.

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As we all know, the gas industry is a sector with a strong cyclical nature, and the changes in the market value of stocks within the sector are affected by both the supply and price changes of natural gas. So, how should we choose investment targets with strong certainty from them?

The author found that some companies in the industry chain, in addition to actively developing their own main businesses, also leverage their own advantages to layout other clean energies, and their anti-cyclical ability will be far superior to that of general peer companies. In the Hong Kong stock market, Hong Kong China Gas Smart Energy (01083.HK) is a representative listed company, which has achieved continuous breakthroughs in new business development while maintaining financial stability.

1. The foundation of the gas business is solid, and the renewable energy business opens up a second growth space

The interim financial report shows that the company's city gas sales volume reached 8.74 billion cubic meters, a year-on-year increase of 6%; the net profit of the gas business reached 851 million Hong Kong dollars, maintaining steady growth.

Such results can be achieved, in addition to benefiting from the rapid growth of the national natural gas consumption market in the first half of this year, it is inseparable from the efforts made by Hong Kong China Gas in gas source coordination, market expansion, promotion of price adjustment, and "gas +" energy services.

On the one hand, the company has ensured the stable supply of gas sources through close cooperation with major gas source suppliers such as "three barrels of oil", and has enhanced its market competitiveness through the expansion of self-operated gas sources and the improvement of gas source supply chains. On the other hand, it has actively explored and achieved results in the field of "gas +" energy services, driving energy sales to increase by 24% year-on-year, and gross profit increased by 17% to 48 million yuan.

In addition, the guidance on the price linkage mechanism of the Development and Reform Commission, as well as the requirements for optimizing the residential ladder gas price system in the "Third Plenary Session", will help to straighten out the price mechanism and repair the gross difference, which is expected to bring greater performance flexibility to Hong Kong China Gas's gas business.

More importantly, while maintaining steady development in the gas industry, Hong Kong China Gas is also actively deploying in the field of renewable energy, especially distributed photovoltaic projects, to seize the incremental potential of the "blue ocean market".The logic behind the layout in the distributed photovoltaic (PV) sector is not hard to comprehend. Compared to traditional large-scale centralized PV power stations, distributed PV projects are usually smaller in scale, thus requiring relatively lower initial investments. Once installed, their operation and maintenance costs are also relatively low. Compared to traditional heavy-asset energy projects, they have a lower entry barrier and higher market adaptability. Precisely for this reason, investing in the distributed PV sector helps Honghua reduce risks in a rapidly changing market environment and achieve more stable profits.

As of the first half of 2024, Honghua has implemented the development of 128 zero-carbon smart parks, with a cumulative signed capacity of 3.3 gigawatts (GW) and a grid-connected capacity of 2.1 GW of photovoltaic installations.

Looking ahead, Honghua's smart energy development plan goes far beyond this. The company plans to further expand the photovoltaic power generation revenue to include photovoltaic management revenues such as asset management (AuM), development, engineering, procurement, and construction (EPC), and operation and maintenance services. At the same time, the company plans to gradually convert photovoltaic customers into microgrid customers to mitigate the risk of photovoltaic power price fluctuations.

S&P Global's Chief Analyst expects that the global photovoltaic installation will reach 520GW in 2024, with China exceeding 240GW, accounting for 43% of the global market share. In such a major trend, Honghua, through a light-asset strategy, actively develops renewable energy businesses, especially distributed photovoltaic projects, and is expected to further unlock the company's value potential through integrated energy services.

II. Two Key Pillars Establish Growth Certainty, Long-term Value Becomes Apparent

From a long-term perspective, can Honghua Smart Energy highly meet the criteria for long-term value investment in individual stocks within the energy industry as mentioned above? The answer must be sought from the following analysis of certainty.

1) Strong Power Demand Strengthens Operator Profits

In recent years, China's carbon dioxide emissions have consistently ranked first in the world. According to data from the State Grid, energy combustion currently accounts for about 88% of China's total carbon dioxide emissions, and the power industry's emissions account for about 41% of the energy industry's emissions. The power sector is a key and crucial area for China's carbon reduction, and the development of green electricity has become an inevitable trend.

Under the guidance of the dual-carbon goals, various policies promoting energy transformation have emerged continuously. From the "14th Five-Year Plan for Renewable Energy Development" and the "14th Five-Year Plan for Science and Technology Innovation in the Energy Field" to the recently released "Opinions on Accelerating the Comprehensive Green Transformation of Economic and Social Development," all place the development of renewable energy in an important position.

At the same time, the total national power demand continues to grow rigidly. According to the "China Power Industry Annual Development Report 2024" released by the China Electricity Council, China's power consumption has continued to grow rapidly this year. From January to May, the national total electricity consumption was 3.84 trillion kilowatt-hours, a year-on-year increase of 8.6%, an increase of 3.3 percentage points compared to the same period in 2023, and an increase of 1.9 percentage points compared to the annual growth rate in 2023. The report also stated that it is expected that by 2030, the national total electricity consumption will exceed 13 trillion kilowatt-hours.What will provide the incremental electricity for this part when the time comes? The answer is naturally green electricity.

Taking into account various factors, the renewable energy market is still expected to achieve sustainable growth driven by policies and market demand in the future. It is easy to associate that listed companies like Hong Kong China Gas, which have laid out in the renewable energy field in advance, are also expected to become long-term beneficiaries under that trend.

2) "Cost-effectiveness" highlights

Hong Kong China Gas Smart Energy also enjoys the certainty advantage of being chosen by market funds.

Yan Zhaojun, a strategist at Zhongtai International, believes that the profits of the Hang Seng Index will rebound in the next two years, and the current valuation of Hong Kong stocks is still at a relatively low level in history. From a configuration perspective, energy, telecommunications, Chinese banks, public utilities, etc., are still the focus of configuration.

At present, Hong Kong China Gas, a comprehensive energy company with a solid main business and a dazzling second growth curve, has been identified by the market as a high-quality asset and is worth long-term configuration. This point is also very certain, which can be seen in the target prices given by major brokers after Hong Kong China Gas's mid-term performance release.

CICC gave it a target price of 3.8 Hong Kong dollars, and Huatai Securities maintained its buy rating with a target price of 3.93 Hong Kong dollars. As of the close on August 22, the stock price of Hong Kong China Gas was only 2.91 Hong Kong dollars. This means that the stock price of Hong Kong China Gas has at least a growth potential of 30.58%.

III. Conclusion

Compared with peers in the Hong Kong stock gas sector, Hong Kong China Gas Smart Energy provides investors with higher dividend returns, coupled with lower valuations and lighter asset models. According to Wind data, as of the close on August 22, the TTM price-to-earnings ratio of Hong Kong China Gas was only 8.57 times, lower than the industry median of 10.3 times. In terms of price-to-book ratio, the price-to-book ratio of Hong Kong China Gas is only 0.46 times, also far lower than the industry median of 0.82.

From the perspective of certainty, Hong Kong China Gas Smart Energy is in a leading position in the industry. Coupled with the gradual improvement of current market liquidity, low valuation targets benefit first, and the possibility of Hong Kong China Gas experiencing a double hit from Davis will also increase.