BEH’s Results Miss Slightly, but Dividend Increases

Narrow-moat Beijing Enterprises Holdings’ 00392 4.5% year-over-year fall in 2022 recurring net profit to HKD 8.2 billion was 6.8% below our expectations, mainly due to sharply higher natural gas prices in the second half. The company was not able to pass through the cost, leading to a 2% squeeze to BEH’s gross margin to 13.3% in 2022. Nevertheless, as the natural gas price is normalizing, our midcycle outlook remains unchanged and our tweaks to our earnings forecast are minor. We maintain our fair value estimate at HKD 39.50, and we forecast the company’s net profit to rise 16% to HKD 8.8 billion in 2023, a 3% cut from our earlier estimate after updating the schedule of the Tianjin LNG project. We continue to believe the shares are undervalued currently, trading at only 0.4 times price/book—a significant discount relative to its underlying assets.

Despite a slight miss in 2022 profit, the 28% year-over-year increase in full-year dividends per share to HKD 1.60 is a positive highlight, which implies a payout ratio of 27%, up from 16% a year ago. DPS disappointment has been a key concern for investors, as the company only receives dividends from all its holding companies and associates. In particular, while the profit at Beijing Gas is high, funding needs for expansion have been limiting cash flow to BEH from Beijing Gas. Management has committed to trying to increase its dividend payout ratio toward 30% in the future, and we think the lift in 2022 is a positive sign that could help to restore investors’ confidence. The 2022 DPS translates to a yield of about 5.7% as of market close on March 31. With completion of the massive investment in the LNG project in 2023, we expect BEH to further lift its payout ratio in 2023, which could provide further support to its share price.