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

Beijing Enterprises Holdings' 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.