2023 A Better Year for China Gas Utilities; Mostly Reflected in Share Prices

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 00384, or CGH, China Resources Gas CRGGF, or CRG, and ENN Energy XNGSF, or ENN, at HKD 16.30, HKD 39.00 and HKD 135.00, respectively, after reviewing our earnings assumptions.

In our view, the China gas utilities sector is fairly valued currently with positive near-term outlook largely priced in. That said, we note that city gas operators could be sensitive to policy movements as they are the proxy for real estate recovery in China. We still see buying opportunities in the sector, and our top pick is CGH given the company’s attractive valuation. The potential listing of CGH’s value-added services segment should be positive to the firm, but we think consistent results improvement will be the key rerating factor for CGH.

According to Chongqing Petroleum and Gas Exchange, China’s weekly domestic consumption of natural gas has been showing positive year on year growth trend since early February until Feb. 17, 2023, a reversal of the negative year on year growth trend in January. We think this reflects the impact of resumption of activities post reopening. Meanwhile, we note that domestic LNG prices have also eased off from the recent high in December 2022, and this should be positive to gas utilities. We expect CRG and ENN to deliver per cubic meter dollar margin of CNY 0.49 and CNY 0.50, respectively, when they announce their 2022 results in March 2023. Meanwhile, we think CGH will achieve dollar margin of CNY 0.50 per cubic meter for fiscal 2023 (ending March).