Towngas - 1HFY25 results below expectations on lower profit from renewable operation and decline in connection fee
- 1HFY25 core profit rose 2%, below expectations due to weaker performance in renewable energy on high comparison base; first interim DPS a positive surprise
- Expect robust growth in renewable energy in 2H from a growing project portfolio, expansion of energy storage capacity and higher electricity generation volume
- Maintain BUY for promising growth outlook in renewable energy; TP raised to HKD4.65 to reflect improved market sentiment
Despite the disappointment in interim results, we remain optimistic about the company’s growth outlook. Our optimism is underpinned by 1) robust growth in power generation on enhanced efficiency through adoption of AI management; 2) declining negative impact from electricity tariff downtrend; 3) 30% growth in energy storage contracts with a tripling in the scale of on-grid energy storage; 4) the extension of Energy-as-a-Service (EaaS) to gas distribution clients; and 5) a continued uptrend in dollar margin for gas distribution business. We have trimmed our FY25/FY25 earnings estimates by 4-5% to reflect the variances in interim results. After the adjustment, TGSE is expected to post earnings growth 2-9% for FY25/FY26. We expect the company to gradually increase the dividend payout ratio to give a decent yield of 4%. We maintain our BUY rating. TP is raised to HKD4.65 with higher target PE of 8.5x (previously 7.5x) to reflect improving market sentiment.
Despite >20% decline in new connection revenue, TGSE’s gas distribution business demonstrated notable resilience with flat gas sales volume in 1HFY25. The performance was slightly below expectations due to a challenging macroeconomic landscape marked by a mild winter and a downturn in the property market. Gas sales volume to residential users climbed only 5.6% (less than expected) while that to industrial / commercial users climbed +0.2% / -5.7% (better than expected). Dollar margin saw an increase of RMB 0.01 to RMB0.57/cm. This improvement was the result of proactive cost pass-through initiatives for both residential and non-residential customers and optimized gas procurement costs. We have trimmed our FY25 growth assumption of gas sales volume by around 3ppt to just 1.2%. But dollar margin hike of RMB0.01/cm can be sustained in 2H due to ample supply of natural gas in China. In particular, PipeChina’s broad pipeline network has improved connectivity, intensifying competitive among three oil majors, keeping gas procurement cost at a low level.
The renewable energy segment continued to be a significant growth engine for TGSE in 1HFY25, delivering a 5% y/y increase in net profit to HKD172mn. An 11% growth in PV business net profit was partly offset by 15% and 13% decline in AuM disposal gain and carbon management services respectively. Installed capacity of commercial and industrial distributed PV grew steadily, reaching 2.6GW by the end of June 2025, with 0.3GW newly connected in 1HFY25. This expansion translated directly into higher output, with power generation volume surging by an impressive 44% to 1.18bn kWh. Gross margin per kWh experienced a slight moderation of Rmb0.04/kWh due to implementation of time-of-use peak and valley electricity pricing in more provinces.
Looking into 2H, we remain optimistic on TGSE’s renewable operation. First, we estimate growth in power generation to remain robust at 38% in 2H, on the back of addition of 500-600MW in its project portfolio and enhancement of 5ppts in power generation through use of AI / digital platform. Second, while increasing market liberalization will lead to persistent downward pressure on electricity tariff, we believe the pressure is easing as most of its projects are already located in those provinces with time-of-use pricing mechanism. In addition, downward pressure is further minimised by having close to 85% of electricity generated for internal consumption with only 15% as market sales. Third, management targets an addition of 225MWh of energy storage contracts to be secured in 2H, bringing the total to 1GWh. Coupled with robust increase of on-grid energy storage capacity from 260MWh in June 2025 to 800MWh in end of 2025, we estimate around 35% growth in profit from carbon management and services. In addition, TGSE is not limiting its renewable energy services to industrial parks, but is also extending to its gas distribution customers, boosting sales of electricity. All these should bring >20% growth in net profit from renewable energy in 2HFY25, or >15% growth for the full year.
In 1HFY25, TGSE has operating cashflow of around HKD1bn and capex of HKD1.4bn. Net debt-equity ratio was stable at around 56% at end of June 2025. Having achieved 560MW AuM capacity and issued two tranches of quasi-REITs (200MW), TGSE has recycled Rmb1.9bn of capital to finance its development in renewable energy. TGSE is planning to issue quasi-REITs on a larger scale, as well as get funding from more strategic investors under is AuM strategy. Coupled with stable operating cashflow from its growing portfolio, we expect TGSE to gradually increase its dividend payout ratio to sustain a yield of 4%.
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