CISI FIN Initiates Coverage on HK & CHINA GAS (00003) with "Overweight" Rating, Expected to Benefit from National Gas Volume Growth and Price Spread Recovery

Stock News
Sep 16

CISI FIN issued a research report stating that HK & CHINA GAS (00003) maintains a fixed dividend policy, consistently paying HK$0.35 per share from 2009 to present (excluding the 2011 special dividend). The company's payout ratio increased from 44% in 2009 to 114% in 2024, with total dividends growing from HK$2.3 billion to HK$6.5 billion, representing a compound annual growth rate of 7.2%. The firm expects the company's attributable net profit for 2025-2027 to be HK$5.848 billion, HK$6.044 billion, and HK$6.456 billion respectively, representing year-over-year growth of 2.4%, 3.4%, and 6.8%. Based on the closing price on September 11, 2025, the dividend yield is 4.9%. CISI FIN initiates coverage with an "Overweight" rating.

**Century-old Gas Operator with Price Adjustment Mechanism Ensuring Steady Development of Hong Kong Business**

The company is the sole gas supplier in Hong Kong, serving 2.04 million customers as of the end of 2024, with a penetration rate of 74%, competing with electricity in the existing market. From 2013-2024, Hong Kong's gas consumption declined 4.9% from 28,556TJ to 27,159TJ. However, benefiting from the price adjustment mechanism (typically adjusting standard usage charges every two years and passing upstream raw material cost fluctuations to users through monthly fuel adjustment charges), the company's Hong Kong business EBITDA grew from HK$4.2 billion to HK$5.8 billion, with a compound annual growth rate of 3.0%, accounting for 49% of total company EBITDA after slight decline and recovery from the previous 44%. The firm believes Hong Kong's gas consumption is expected to remain stable or experience modest growth, as gas has cost and emission reduction advantages over electricity, with room for further price increases.

**Excellent Mainland City Gas Project Layout, Expected to Benefit from National Gas Volume Growth and Price Spread Recovery**

The company began expanding mainland operations in 1994. As of the end of 2024, its mainland business spans 23 provincial regions, focusing on first and second-tier cities in eastern coastal areas and Chengdu-Chongqing region. Gas sales volume achieved a compound growth rate of 7.3% from 2019-2024, compared to national apparent consumption growth of 7.0% during the same period. For 2024-2030, the State Council Development Research Center forecasts national natural gas apparent consumption compound growth rate may reach 5.9%. As a national city gas leader with excellent project layout, the company's gas sales volume growth is expected to match or slightly exceed this rate. In 2024, the company's mainland gas sales price spread (excluding distribution gas) increased 11% year-over-year to RMB 0.52/cubic meter. With continued residential price normalization and cost improvements, the firm expects price spreads to increase to RMB 0.54, 0.55, and 0.58/cubic meter for 2025-2027.

**Extended Business Reorganization with Green Energy Capacity Set for Release**

The company's extended business includes smart kitchens, insurance, and safe home solutions. With rich operating experience in Hong Kong, it achieved 80% and 30% market shares in gas appliances and cabinets respectively in 2023, while mainland business smart kitchen and safe home market shares are only 10% and 6%. In 2024, the company reorganized and integrated mainland and Hong Kong extended businesses, planning to introduce strategic investors for continued development. In green energy, the company has a "sea, land, air" layout in green methanol, sustainable aviation fuel, and hydrogen energy, with capacity expected to be gradually released from 2025-2028.

**Capital Expenditure Contraction with Multiple Measures to Improve Cash Flow**

From 2021-2024, the company's operating cash flow decreased slightly from HK$10.5 billion to HK$9.0 billion, while capital expenditure declined from HK$10.2 billion in 2023 to HK$6.0 billion in 2024. The company continues optimizing non-core businesses and may advance asset reorganization plans, with plans to introduce strategic investors for extended businesses. The firm expects the company's performance and capital expenditure to remain stable or experience modest growth. Combined with asset disposal optimization plans, free cash flow is expected to gradually cover the annual fixed dividend of HK$6.5 billion.

**Risk Factors:** Gas sales volume growth below expectations; residential price normalization progress below expectations; significant increases in upstream natural gas prices.

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