Company Reports

China Resources Gas Group is a state-owned gas utilities group in China engaging in downstream city gas distribution. We expect CRG to generate returns above its cost of capital over the next decade, supporting our narrow-moat rating. China’s goal to increase gas usage to 15% of the country’s energy sources by 2030 will continue to encourage long-term demand growth, in our view. We project CRG’s natural gas sales volume to grow at a 5.9% CAGR during 2023-28.

After fine-tuning our model, we marginally raise narrow-moat China Resources Gas’ fair value estimate to HKD 31 per share from HKD 30. CRG’s first-half gas margin is tracking above our full-year assumption. Coupled with better cost control, this led to a 21% year-on-year rise in interim core net profit (which excludes a one-off gain in first half 2023) to HKD 2.86 billion. The 67% rise in the interim dividend is also a surprise, but we keep our full-year dividend payout at 50% as CRG did not commit to a higher payout. Although we think CRG presents decent share price upside, our preferred pick for the sector is ENN Energy, given its larger discount to our valuation and more diversified earnings streams.

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.

China Resources Gas’, or CRG’s, 2023 net profit was up 10% year on year to HKD 5.2 billion. While the firm’s gross profit was in line with our forecast, net profit was below mainly due to higher finance and amortization costs. After factoring in the latest results, our 2024-26 earnings forecasts are cut by an average of 12% and we lower CRG’s fair value estimate to HKD 30.00 per share from HKD 31.00. The reduction in fair value estimate is marginal as we also project lower capital expenditure during 2024-26.

China Resources Gas Group is a state-owned gas utilities group in China engaging in downstream city gas distribution. We expect CRG to generate returns above its cost of capital over the next decade, supporting our narrow-moat rating. China’s goal to increase gas usage to 15% of the country’s energy sources by 2030 will continue to encourage long-term demand growth, in our view. We project CRG’s natural gas sales volume to grow at a 5.9% CAGR during 2023-28.

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 Resources Gas Group is a state-owned gas utilities group in China engaging in downstream city gas distribution. We expect CRG to generate returns above its cost of capital over the next decade, supporting our narrow-moat rating. China’s goal to increase gas usage to 15% of the country’s energy sources by 2030 will continue to encourage long-term demand growth, in our view. We project CRG’s natural gas sales volume to grow at a 7.3% CAGR during 2022-27.

Narrow-moat China Resources Gas’, or CRG’s, first-half 2023 net profit was up 16.4% year on year to HKD 3.55 billion. Stripping out the gain from the disposal of an associate, the results were broadly within our expectations, but we expect a mixed market reaction with CRG lowering sales guidance. We cut our 2023-25 earnings estimates by 1.9%-7.1% after incorporating the latest operating statistics and depreciation of the Chinese yuan, and lower our fair value estimate to HKD 32.00 from HKD 33.50. We think CRG is undervalued currently, with shares trading at about 5% estimated dividend yield for 2023 and 9 times 2023 P/E as of Aug. 25 closing, which is the lower end of the five-year historical trading range of around 7 times to 19 times. Nonetheless, we believe the slowdown in the property sector will continue to weigh on CRG’s near-term share price performance.

China Resources Gas Group is a state-owned gas utilities group in China engaging in downstream city gas distribution. We expect CRG to generate returns above its cost of capital over the next decade, supporting our narrow-moat rating. China’s goal to increase gas usage to 15% of the country’s energy sources by 2030 will continue to encourage long-term demand growth, in our view. We project CRG’s natural gas sales volume to grow at a 7.3% CAGR during 2022-27.

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’ 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.

Narrow-moat China Resources Gas’, or CRG’s, 2022 net profit of HKD 4.7 billion, down 26% year on year, was below our expectation. This was mainly attributable to higher operating costs and lower contribution from joint ventures. We lower CRG’s fair value estimate to HKD 33.50 from HKD 39.00 to factor in the disappointment. We think the firm is fairly valued currently as we believe negative concerns have been largely priced in. CRG is trading at around 11 times forward P/E, the lower end of its five-year historical trading range of around 7 times to 19 times. Despite the weaker earnings, CRG’s payout ratio was increased to 50% in 2022 from 45% in 2021, implying a decent estimated 2023 dividend yield of more than 4%.

China Resources Gas Group is a state-owned gas utilities group in China engaging in downstream city gas distribution. We expect CRG to generate returns above its cost of capital over the next decade, supporting our narrow-moat rating. China’s goal to increase gas usage to 15% of the country’s energy sources by 2030 will continue to encourage long-term demand growth, in our view. We project CRG’s natural gas sales volume to grow at an 8.2% CAGR during 2022-27.

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.

China Resources Gas Group is a state-owned gas utilities group in China engaging in downstream city gas distribution. We expect CRG to generate returns above its cost of capital over the next decade, supporting our narrow-moat rating. China’s goal to increase gas usage to 15% of the country’s energy sources by 2030 will continue to encourage long-term demand growth, in our view. We project CRG’s natural gas sales volume to grow at an 8.8% CAGR during 2021-26.

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.

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.

China Resources Gas Group is a state-owned gas utilities group in China engaging in downstream city gas distribution. We expect CRG to generate returns above its cost of capital over the next decade, supporting our narrow-moat rating. China’s goal to increase gas usage to 15% of the country’s energy sources by 2030 will continue to encourage long-term demand growth, in our view. We project CRG’s natural gas sales volume to grow at a 9.3% CAGR during 2021-26.

Narrow-moat China Resources Gas’, or CRG’s, first-half 2022 net profit of HKD 3.05 billion, down 6.3% year on year, was mainly attributable to lower dollar margin and COVID-19 disruptions. The results were broadly within our expectation. We lower our fair value estimate to HKD 39.00 from HKD 42.50, after incorporating management’s guidance and depreciation of the Chinese yuan. We also increase our Morningstar Uncertainty Rating to High from Medium as prolonged high energy costs could add risk. We think CRG is undervalued currently, with shares trading at about 11 times 2022 P/E as of Aug. 26 closing, the lower end of the five-year historical trading range of around 9 times to 19 times. While looking historically cheap in terms of P/E, we believe the slowdown in the property sector and high input costs are likely to continue weighing on its near-term share price performance.