Company Reports

China Gas Holdings’, or CGH’s, fiscal 2024 (ending March) results were disappointing, falling 26% year on year. Stripping out other losses (mainly impairment losses of HKD 686 million on trade receivables and contract assets), core earnings were still 4% lower. We cut our fiscal 2025-27 earnings estimates by 13%-17% to reflect lower gas and connections income, slower value-added services, or VAS, earnings growth, and a weaker Chinese yuan. Consequently, our fair value estimate is reduced to HKD 11.50 per share from HKD 12.50. Although CGH’s valuation is undemanding, our preferred pick in the sector is ENN Energy as we think investors will need time to regain confidence on CGH given its consistent underperformance in earnings.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. The firm benefits from exclusive city gas concession rights and efficient scale. In the past, CGH aggressively expanded into rural city gas projects, resulting in a stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services, and integrated energy businesses.

We think the China city gas sector is currently undervalued, but our preferred pick is ENN Energy, given its well-diversified earnings supported by its integrated energy, or IE, segment and value-added business, or VAB. Following the in-line first-quarter operating data from ENN, we keep its fair value estimate at HKD 88 per share. We believe the data supports our view of a gradual recovery for the industry and should be a positive read across for China Gas Holdings, or CGH, and China Resources Gas, or CRG, where we maintain our fair value estimates of HKD 12.50 and HKD 30.00 per share, respectively.

As we saw weaker 2024 new residential connections guidance from both narrow-moat ENN Energy and China Resources Gas, we decided to fine-tune our earnings forecasts for narrow-moat China Gas Holdings, or CGH, to incorporate the latest trend. This leads to CGH’s fiscal (ending March) 2024-26 earnings estimates being lowered by 1%-2%, and our fair value estimate is slightly reduced to HKD 12.50 per share from HKD 12.60.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital, and we expect this to continue over the next decade, supporting our narrow moat rating for CGH. In the past, CGH aggressively expanded into rural city gas projects, resulting in a relatively stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services business, as well as development of the urban heating business.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital, and we expect this to continue over the next decade, supporting our narrow moat rating for CGH. In the past, CGH aggressively expanded into rural city gas projects, resulting in a relatively stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services business, as well as development of the urban heating business.

China Gas Holdings’, or CGH’s, first-half fiscal 2024 (ending March) net profit was down 44% year on year to HKD 1.8 billion. Stripping out other losses of HKD 538 million, this is largely in line with our expectations. After fine-tuning our earnings forecasts, we keep our fair value estimate of HKD 12.60. While the shares remain attractive, we think CGH needs to deliver consistent results improvement before it deserves a rerating. CGH has lowered guidance for a few segments, but this is not surprising and is similar to peers ENN Energy and China Resources Gas, or CRG. That said, it is clear that the dollar margin recovery for gas utilities is on track and this should continue to support earnings growth. We think the city gas sector is undervalued currently and our preferred pick is ENN Energy given the firm’s share buyback plan and potential in the integrated energy and value-added businesses.

ENN Energy’s third-quarter 2023 operating data was largely in line with our expectations, but we see a softer outlook in certain segments which can be negative for peers. After reviewing our assumptions, we lower China Gas Holdings’, China Resources Gas’, and ENN Energy’s fair value estimates to HKD 12.60, HKD 31.00, and HKD 102.00 from HKD 13.70, HKD 32.00, and HKD 107.00, respectively. The reduced valuation largely reflects the lower gas sales forecasts and a slower-than-expected recovery in the real estate sector, which negatively affects new residential connections. After the recent selloff due to concerns about the growth outlook, we believe the sector is undervalued now. We think the sector will be rerated if the dominant players can deliver consistent improvements in earnings. China Gas Holdings will announce its first-half fiscal 2024 (ending March) results in late November 2023, and this should be closely watched. Our preferred pick is ENN Energy given the firm’s share buyback plan and potential in the integrated energy and value-added businesses.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital, and we expect this to continue over the next decade, supporting our narrow moat rating for CGH. In the past, CGH aggressively expanded into rural city gas projects, resulting in a relatively stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services business, as well as development of the urban heating business.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital, and we expect this to continue over the next decade, supporting our narrow moat rating for CGH. In the past, CGH aggressively expanded into rural city gas projects, resulting in a relatively stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services business, as well as development of the urban heating business.

We think the gas utilities sector is undervalued, but our preferred pick is ENN Energy, given its well-diversified earnings and ability to source competitively priced gas. Although China Gas Holdings’, or CGH’s, valuation is undemanding, we acknowledge that the firm will need to show consistent improvement in earnings before a rerating kicks in. Following CGH’s disappointing fiscal 2023 (ending March) results, we cut our fiscal 2024-25 earnings estimates by about 21% to reflect lower connections income.

Overall, we think the city gas sector is currently undervalued, but our preferred pick is ENN Energy, given its well-diversified earnings and ability to source competitively priced gas. Following first-quarter operating data from ENN, we keep ENN’s fair value estimate at HKD 130 and we think the shares are attractive now with key negatives largely priced in. We believe the data reaffirms a gradual recovery for the industry. ENN keeps its key guidance unchanged, and this also indicates a better outlook for China Gas Holdings and China Resources Gas, where we maintain our fair value estimates of HKD 16.30 and HKD 33.50, respectively, after reviewing our earnings forecasts. Taking into account weaker 2022 results from ENN and CRG, we think CGH will post a 22% fall in fiscal 2023 (ending March) earnings before recovering in fiscal 2024.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital, and we expect this to continue over the next decade, supporting our narrow moat rating for CGH. In the past, CGH aggressively expanded into rural city gas projects, resulting in a relatively stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services business, as well as development of the urban heating business.

2022 has been a challenging year for China gas utilities given COVID-19 restrictions and the lackluster real estate market. However, we expect them to benefit from the reversal of China’s COVID-19 policies in 2023. Coupled with supportive measures for the property sector, gas utilities should see better gas sales volume and new residential connections. We keep our fair value estimates for China Gas Holdings, or CGH, China Resources Gas, or CRG, and ENN Energy, or ENN, at HKD 16.30, HKD 39.00 and HKD 135.00, respectively, after reviewing our earnings assumptions.

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.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital, and we expect this to continue over the next decade, supporting our narrow moat rating for CGH. In the past, CGH aggressively expanded into rural city gas projects, resulting in a relatively stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services business, as well as development of the urban heating business.

ENN Energy’s third-quarter 2022 operating data was largely in line with our expectations, and we believe this indicates that other city gas distributors should be able to meet their key targets. After considering the weaker Chinese yuan and finetuning our assumptions, we lower ENN’s fair value estimate to HKD 135 per share from HKD 140. Due to concerns on lower dollar margins and slower new residential connections, the sector has taken a hit, but we think ENN, China Gas Holdings, and China Resources Gas are all undervalued currently. We believe the sector will be rerated if the dominant players can deliver their guidance in 2022. China Gas Holdings will announce its first-half fiscal 2023 (ending March) results in late November 2022, and this should be closely watched. Our preferred pick is ENN given the firm’s ability to source liquefied natural gas at competitive prices and its potential in the fast-growing integrated energy business.

Narrow-moat China Gas Holdings’, or CGH’s, fiscal 2022 (ending March) core net profit of HKD 8.05 billion, down 22% year on year, was in line with our expectation but missed FactSet’s consensus estimate. We lower our fair value estimate to HKD 20 from HKD 23, after considering the depreciation of the Chinese yuan and slower earnings growth for the value-added services, or VAS, segment. We think CGH is undervalued at the current share price given its undemanding valuation. However, we acknowledge that the firm will need to show consistent improvement in earnings and cash flows before a rerating kicks in. Despite the weaker earnings, fiscal 2022’s dividend remains unchanged at HKD 0.55 per share, as management remains focused on improving shareholder returns.

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital, and we expect this to continue over the next decade, supporting our narrow moat rating for CGH. In the past, CGH aggressively expanded into rural city gas projects, resulting in a relatively stretched balance sheet compared with its peers. The firm now focuses on the asset-light value-added services business, as well as development of the urban heating business.

We cut narrow-moat China Gas Holdings’, or CGH’s, fair value estimate to HKD 23.00 from HKD 28.00, after lowering our dollar margins and new residential connections assumptions. CGH will announce its fiscal 2022 results (ending March) in June, and we believe fiscal 2023 will remain challenging, given high input costs and slowdown in the property sector. We assume average dollar margin of CNY 0.53 per cubic meter and annual new residential connections of 2.9 million during fiscal 2022-24, lower than the CNY 0.61 and 5.2 million during fiscal 2019-21, respectively. We believe CGH is currently undervalued, but we see lack of near-term catalysts to rerate the firm.