Hong Kong and China Gas (Towngas) shares plunged by as much as 15 per cent after the gas distributor posted worse-than-expected annual results and suspended its long-standing practice of issuing bonus shares. Analysts slashed the target prices on the stock citing a dimmer profit outlook, particularly on the mainland where the squeeze on its profit margin was worse than its rivals. It is one of the few Hong Kong utilities stocks favoured by investors looking for stable dividends. “We reiterate our sell rating on [Towngas] after it reported earnings miss for 2021, with profit drops from both Hong Kong and China, as well as no bonus dividend which was the first time since 2008,” wrote Citi’s head of Asian utilities and clean energy research Pierre Lau in a note. His team has slashed the net profit forecast for Hong Kong’s sole piped gas distributor and one of the largest players on the mainland by 15.1 per cent for this year and by 13.9 per cent for next year. Citi also cut their target price on the stock by 10 per cent to HK$10.8. Daiwa Capital Market’s analysts lowered theirs by 27 per cent to HK$9.8. Towngas’ shares closed 14.1 per cent lower at HK$9.98 on Tuesday, after trading as low as HK$9.85. The company on Monday posted a 16.5 per cent decline in net profit to HK$5.01 billion (US$640 million) last year, 36 per cent lower than the HK$7.8 billion average estimate of analysts polled by Bloomberg. Recurring core net profit fell 9 per cent to HK$6.17 billion, excluding HK$1.5 billion of asset impairment provisions for mainland Chinese chemical, telecommunications and gas refilling station assets booked last year. The sharp spikes in international natural gas prices induced by tight European supply in last year’s second-half eroded the profit margin of its mainland operations, chairman Martin Lee Ka-shing said in a statement on Monday. The severe impact of the fifth wave of the Covid-19 pandemic in Hong Kong this year means it faces an uncertain business environment, and it will “cut costs appropriately and optimise workflow”, he added. Towngas declared a final dividend of HK$0.23 per share, taking the annual total to HK$0.35. Lee said that “barring any unforeseen circumstances” this year’s dividend will be same as last year. The cancellation of the bonus shares issuance was because of the need to keep more cash amid uncertain economic times and to fund potential decarbonisation-related investment opportunities on the mainland, chief financial officer John Ho Hon-ming told analysts on Monday. He did not say when or under what circumstances it may resume the practice. Towngas has a decades-long tradition of issuing bonus shares, except between 2002 and 2005 and in 2008 when Hong Kong’s economy was in a downturn, Daiwa’s head of regional utilities research Dennis Ip noted. Although Towngas offered a dividend projection of HK$20 billion over three years, indicating a one-for-20 bonus share issue was possible, Ip said it should not be taken as guaranteed unless it succeeds in raising tariffs in Hong Kong this year. Towngas and CATL eye China’s growing demand for renewable energy storage systems Towngas did not raise tariff as expected last year – typically once every two years – because of the Covid-19 pandemic’s impact on the economy. While it continues to face cost pressures in Hong Kong, it had no time-table to increase tariffs this year, CFO Ho told analysts. It would be difficult to raise tariffs any time soon, because Hong Kong’s catering industry has been badly hit by the pandemic, Citi’s Lau said. On the mainland, Towngas’ operating profit declined 11 per cent to HK$3.27 billion last year, as profit margin fell by 0.11 yuan per cubic metre of gas sold to 0.48 yuan last year, Ip noted. It contrasted with profit growths reported by its mainland peers ENN Energy and China Resources Gas Group, which saw unit margin squeeze of 0.09 yuan and 0.07 yuan, respectively. Towngas’ management attributed this to differences in the firms’ operating regions.