China Gas Utilities: China Gas’ Strong Dollar Margin Guidance a Positive Read for the Sector

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.

Our fair value estimate for CGH is reduced to HKD 13.70 from HKD 16.30. However, we think the shares remain undervalued and CGH’s fiscal 2024 guidance reaffirms a gradual recovery of dollar margin for the industry. This indicates a better outlook for China Resources Gas 01193 and ENN Energy, where we maintain our fair value estimates of HKD 33.50 and HKD 130.00, respectively.

In fiscal 2023, CGH’s retail gas sales volume rose 5% year on year, while new residential connections were down 22% to 2.3 million due to the lackluster real estate industry and COVID-19 restrictions. Similar to peers, dollar margin at CNY 0.42 per cubic meter was disappointing due to higher raw material costs and insufficient gas supply.

CGH guided to fiscal 2024 retail gas sales volume growth of 10% with sharply higher dollar margin of CNY 0.56. The sales target is comparable with peers’ guidance, but the dollar margin goal is higher than ENN Energy’s 2023 guidance of CNY 0.50. We think this shows management’s confidence in the cost pass-through mechanism and suggest further upside for peers’ dollar margins. CGH’s cumulative volume growth exceeded 10% year on year for April to May, while the cumulative dollar margin was CNY 0.48 in April and CNY 0.54 in May. New residential connections guidance is around 1.8 million to 2.0 million, which is reasonable given CGH’s high penetration rate of 68.6% as of end of fiscal 2023, and the slow property market in China. Hence, we believe these targets are achievable.