Towngas Smart Energy (TSEL) has posted 1H26 revenue of HKD11,328mn (+9% YoY) and a core profit of HKD690mn (-4% YoY), with the latter falling shy of the lower end of our estimate (HKD695mn). We attribute this miss largely to a steeper-than-expected drop in renewable-energy tariffs. The company declared an interim dividend of HKD0.05 per share (flat YoY), implying a trailing 12-month dividend yield of about 5.8%. We are optimistic about improving city-gas dollar margins and the scaling of the ‘Gas+’ integrated energy business. We expect downward pressure on power tariffs to ease meaningfully in 2H26, while the renewable energy AuM model and market-based electricity sales could expand the long-term growth runway. Maintain BUY.
Factoring in the renewable-energy segment’s 1H26 operating data, we lower our renewable energy tariff and consolidation ratio assumptions. We revise down our 2026/2027/2028 (core) attributable net profit forecasts by 5.1/8.9/10.6% to HKD1,525/1,605/1,749mn, and project EPS of HKD0.40/0.42/0.46. In our SOTP model, we value the city gas segment at 8x 2026E PE (in line with its five-year historical average) and the renewable-energy segment at 21x 2026E PE (below its peers’ average of 25x). We assign a target market cap of HKD15.7bn and a target price of HKD4.16 (previous: HKD5.12), implying upside potential of about 32%. We are optimistic about the earnings upside and valuation recovery potential once renewable-energy tariffs bottom out. Maintain BUY.