Key Takeaways:
JPMorgan upgraded Hong Kong and China Gas to overweight from neutral, raising its target price to HK$7.75 from HK$7.30 after the utility's first-half profit beat expectations.
The sustainable aviation fuel business is the key growth driver, JPMorgan said, with production capacity set to double and elevated oil prices supporting higher average selling prices.
The company reported net profit of HK$3.64 billion for the six months through June, up 23 percent from a year earlier, far exceeding the market's expectation of 4 percent full-year growth. Revenue rose 7 percent to HK$29.5 billion. JPMorgan forecast sustainable aviation fuel will contribute more than HK$1 billion in profit this year, driving more than 10 percent growth in full-year earnings after last year's negative growth.
The stock rose about 6.5 percent intraday. JPMorgan raised its 2026-2028 earnings forecasts by 4 percent to 6 percent to reflect higher sustainable aviation fuel assumptions. The group's dividend yield of 5.2 percent, more than 80 basis points above the average of other Hong Kong utility stocks, makes its risk-reward profile attractive, the broker said.
Towngas kept its interim dividend unchanged at 12 HK cents. Capital expenditure reached HK$2 billion in the first half, down from HK$2.5 billion a year earlier, and its stable dividend policy is expected to remain sustainable. Although management remains cautious on dividends, it may consider increasing payouts if strong earnings growth continues for more than one year, JPMorgan noted.
The sustainable aviation fuel business is expanding rapidly. Incubated unit EcoCeres sold around 320,000 tonnes of green fuels, including sustainable aviation fuel, in the first half, roughly double the year-earlier level. EcoCeres is working with the Dongguan municipal government to build the Greater Bay Area's first complete sustainable aviation fuel value chain, which could produce about 450,000 tonnes of sustainable aviation fuel and hydrotreated vegetable oil annually. When completed, EcoCeres' total annual capacity would reach 1.22 million tonnes.
In green methanol, joint venture Venex is ramping capacity to 300,000 tonnes in Inner Mongolia and will begin construction of a Foshan plant with planned capacity of 200,000 tonnes. In renewable energy, new grid-connected distributed photovoltaic capacity reached 0.2 gigawatt during the period, bringing cumulative installed capacity to 3 gigawatts. Photovoltaic electricity sales rose 12 percent year-on-year to 1.32 billion kilowatt-hours, while electricity trading sales volume doubled to 7.23 billion kilowatt-hours.
Bank of America Securities also raised its target price on the stock to HK$7.30, saying first-half profit strongly beat expectations. The US-Iran conflict has laid bare the fragility of the global fossil energy supply chain, showing the strategic importance of the group's commitment to green and smart energy, Towngas said.
The upgrade reflects JPMorgan's expectation that the sustainable aviation fuel ramp will drive a sustained earnings re-rating for the utility. Investors will watch whether management raises its dividend as earnings growth extends beyond a year, and completion of the Dongguan sustainable aviation fuel plant remains the next major catalyst.
This article is for informational purposes only and does not constitute investment advice.
