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China Gas Utilities:The inflection point has come. Time to turn positive

研究机构:摩根大通(亚太) 研究员:Elaine Wu,Boris Kan 发布时间:2015-07-31

We assume coverage of China gas utilities with a positive view. This hasbeen the worst performing subsector within China utilities in the past year,with shares declining by 17%, underperforming HSCEI by 22%. The keyreason for the underperformance was weakening gas demand. However,we believe the sell-off is overdone and recommend buying ahead of apotential gas price cut in September, margin expansion and improving gasdemand in 1H16. Our top pick is China Gas Gas demand to stabilize in 2016. Natural gas consumption has hit aninflection point where demand returned to positive territory in June(from negative growth in April and May) and will stabilize in the next12 months, in our view. The improvement will be driven by lower gasprices from Sept onwards and industrial users’ conversion from coal togas, as directed by the government.

Price cut of 10-20% in September. Natural gas prices are currentlyc30% higher than alternative fuel prices. Based on the NDRC natural gasprice formula, NG prices should be cut by c40%. We expect the actualcut, when it’s announced in August and implemented in September, willbe 10-20% (or Rmb0.3-0.4/m3) to mitigate the impact on upstreamproducers.

Interim results may surprise on the upside. We think ENN’s 1H15 netprofit growth will beat consensus estimates by 5% due to marginimprovement and more new connections. We expect inline results for theother names.

Rating upgrade and PT changes. We upgrade ENN to OW on back ofmargin improvement, new connection growth and attractive valuation(P/E of 14x vs historical average of 16x). We lift our PT on China Gas toHK$17.5 and maintain our OW rating on back of resilient EPS growth ofc25%. We are OW on CR Gas (on M&A growth) and BJ Enterprises(undemanding valuation of 11x P/E vs historic average of 16x).

Risks to our view. Delays in gas cost cut, lower-than-expected gasdemand, no margin improvement, and changes to government’s plan toincrease gas consumption.

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