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China Gas Sector:Between a rock and a hard place

研究机构:建银国际 研究员:Christeen So,Felix Lam 发布时间:2015-01-13

Gas price reform will remain in place。

Despite oil and gas both being imported fossil fuels, we believe themarket has over-correlated international spot oil price with China’sgas import price. Given China’s current gas price mechanism, weestimate that city gate price for non-residential incremental volumewill decline by 7% (assuming the price of oil hovers at the US$50-60/bbl level). At the same time, we expect a 12% increase in existingvolume price (derived from 2012 base volume), which is still pricing atapparent discount to incremental volume price. This should unify thetwo pricing tiers for non-residential gas volume while blended gateprice will remain on the rise.

Risk of slower gas demand and gas connections could weigh onearnings。

Despite city gas volume growth consistently outperforming industryvolume growth to date, we believe the underlying risk of slower gasdemand is increasing given natural gas’ lost cost advantage asalternative fuel prices drop. We see potential for low-end industrialusers turning to cheaper fuels and a reduction in industrialproductivity due to higher gas costs and slower GDP growth. Vehiclegas demand could be undermined by the narrowing price gapbetween gasoline/diesel and CNG/LNG as well as the government’srecent announcement of possible curtailment of oil-to-gas vehicleconversion. Unexciting property sales and weak new-floor spacestart could also imply slower gas connections.

Sector de-rated but yet to hit the trough。

Gas utility names have corrected 18% in the past six months.

Valuation has fallen from the 5-year peak of a 23.7x average PE tothe current 2015F 14.5x PE. Kunlun and BEH appear to be very closeto 5-year trough valuations, while ENN Energy (2688 HK, N), CR Gas,and Towngas are trading at a 3.3x-3.4x premium to their 5-year lows.

We believe share prices of gas operators will remain range-boundedin 1H15F. Given the potential margin squeeze and slower volumeand gas connection risks, we are very selective on gas names. Weprefer China Gas (384 HK, O) and Beijing Enterprises Holdings (392 HK,O) within the gas utilities space, on the former’s strong volume andconnection growth and the latter’s low margin risk, We downgradeCR Gas (1193 HK, U) and Towngas China (1083 HK, U) toUnderperform from Neutral on their respective unexciting volumegrowth and the lack of near-term catalysts.

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