20171127-招商证券_香港_-Gas_sector_Gas_up_China,_BUY_48页_1mb

Industry Report Summary: Gas Sector in China

Core Content

This report provides an investment analysis of the gas sector in China, focusing on city gas operators. The sector is viewed positively due to strong long-term growth prospects, supported by government policies, market liberalization, and increased demand for natural gas. The report highlights two top picks: China Gas (384 HK) and ENN Energy (2688 HK), both with a BUY rating. It also outlines key catalysts, downside risks, and valuation methods.

Main Points

Positive Outlook

• The gas sector is expected to grow at a 15% CAGR over the next four years.
• China Gas and ENN Energy are highlighted for their strong growth profiles.
• The report suggests that share price weakness presents an opportunity for investors to capture long-term growth.

Key Catalysts

• Better-than-expected gas sales
• Faster-than-expected coal-to-gas conversion in Northern China
• Increasing residential gas usage
• Earlier-than-expected access to cheaper gas sources

Key Downside Risks

• Slower industrial production growth
• Changes to the government's long-term gas usage plan
• Unfavorable regulatory changes
• Inability to pass on higher upstream costs to end users

Top Picks

China Gas (384 HK)

• Rating: BUY
• Target Price: HK$29.00
• Upside: 23.7%
• Key Advantages:
  • Aggressive rural expansion
  • Strong presence in high-growth markets
  • Fast-growing high-margin value-added services
• EPS CAGR (2017-19E): 23%
• P/E (2017E): 20.6x
• P/E (2018E): 16.7x
• P/B (2017E): 5.6x
• P/B (2018E): 4.7x
• ROE (2017E): 26.8%
• ROE (2018E): 25.9%

ENN Energy (2688 HK)

• Rating: BUY
• Target Price: HK$66.00
• Upside: 12.5%
• Key Advantages:
  • Strong penetration in Northern China
  • Early move into LNG import business
• EPS CAGR (2017-19E): 18%
• P/E (2017E): 15.6x
• P/E (2018E): 12.6x
• P/B (2017E): 3.2x
• P/B (2018E): 2.7x
• ROE (2017E): 19.1%
• ROE (2018E): 23.0%

Valuation Methodology

• DCF-based Valuation is used, incorporating the time value of future cash flows.
• WACC for China Gas: 8.7%, ENN Energy: 8.5%
• Terminal Growth Rate for both: 3.3% and 3.2% respectively
• Target Price for China Gas: HK$29.00
• Target Price for ENN Energy: HK$66.00

Investment Thesis

• The gas sector is expected to outperform due to:
  • Accelerating gas demand growth
  • Access to low-cost gas sources
  • Removal of regulatory uncertainties
• Gas sales volume is projected to grow at 18-26% CAGR (2017-19E), offsetting margin contraction.
• China Gas is expected to deliver the strongest EPS growth due to its aggressive expansion and high-margin services.
• ENN Energy benefits from strong penetration in Northern China and early LNG import initiatives.

Sector Performance

• Recent Performance: The sector has seen a 5-100% rally over the past 6 months, but is currently in a rebound phase due to lack of near-term catalysts.
• Relative Return (6m): 20.5%
• Absolute Return (6m): 33.1%
• Current Price: China Gas (HK$23.45), ENN Energy (HK$58.65)
• Target Price: China Gas (HK$29.00), ENN Energy (HK$66.00)

Policy and Market Liberalization

• The government has introduced policies to liberalize the gas market, including:
  • Merged pricing of existing and incremental gas
  • Net-back pricing mechanism
• Regulatory Uncertainty has been reduced with a 7% ROA cap on downstream projects.
• Market liberalization is expected to intensify competition but also open up access to cheaper gas sources and increase market share for agile operators.

Financial Highlights

Conclusion

The gas sector in China is poised for long-term growth, driven by government policies, market liberalization, and rising demand. While current share price weakness presents an opportunity, investors should remain patient for further catalysts. China Gas and ENN Energy are the top picks due to their strong growth prospects, aggressive expansion, and strategic positioning in key markets. The report emphasizes the importance of value-added services and early access to low-cost gas sources in driving future performance.