China Gas Utilities: ENN Energy’s Operating Performance a Mixed Bag; Sector Undervalued

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.