Beijing Enterprises Earnings: Results Slightly Miss, but Payout Ratio Lifts Investor Confidence

Beijing Enterprises Holdings’ 00392 28% year-over-year fall in first-half recurring net profit to HKD 3.9 billion slightly missed our expectations. The result was damped by higher interest expenses, unfavorable exchange rates, and disappointing profit contribution from 23%-owned associate China Gas. Nevertheless, management expects improving second-half performance as gas demand picks up and the dollar margin benefits from cost pass-through policies. We lowered our 2023 recurring net profit forecast by 4% to HKD 7.8 billion to incorporate the weaker-than-expected results. This implies a 5% fall from a year ago. We maintain our HKD 39.50 fair value estimate. We believe the shares are undervalued as of the Aug. 31 market close, trading at only 0.4 times price/book—a significant discount relative to the value of the underlying assets.

Despite the earnings miss, the 86% year-over-year increase in interim dividend per share to HKD 0.93 is a positive highlight; this implies a payout ratio of 30% on recurring net profit, up from the 25% in 2022. Management has committed that it will raise the dividend payout ratio to 35% by 2025, which we think will help to restore investors’ confidence. Our forecast 2023 DPS of HKD 1.93 translates to about a 6.6% yield as of the Aug. 31 market close. With the completion of the massive investment in its LNG project, we think BEH’s goal is achievable and could provide further support to its share price.

Given that the gas utility business makes up the bulk of BEH’s operating profit, we expect the company to continue to deliver steady earnings growth. As such, we forecast BEH’s recurring net profit to grow at a CAGR of 5% between 2022 and 2027.