China Gas Holdings' Weak 1H Results Partly Affected by One-Off Items and COVID-19 Restrictions

Narrow-moat China Gas Holdings’, or CGH’s, first-half fiscal 2023 (ending March) net profit was down 20.6% year on year to HKD 3.3 billion. This is below our expectations, and we cut our fair value estimate to HKD 16.30 from HKD 20.00, after taking the weak results into account. While management explains that excluding one-off items and the depreciation of the Chinese yuan, earnings were only down 3%-5% year on year, we believe the poor results will dampen near-term share price performance as investor confidence is negatively affected. Although we think the shares remain attractive, we think CGH will need to deliver consistent results improvement before the firm deserves a rerating. Despite the disappointing results, the firm’s guidance for fiscal 2023 dollar margin is unchanged at CNY 0.50 per cubic meter (similar to ENN Energy’s 2022 target), which implies that cost pass-through during this winter should be better than the previous year and this is positive for ENN Energy and China Resources Gas. We think the city gas sector is undervalued currently and our preferred pick is ENN Energy given the firm’s ability to source liquefied natural gas at competitive prices and its potential in the fast-growing integrated energy business.