20171017-申万宏源研究_香港_-Winter_warm-up_Gas_utilities__Sector_outlook_13页_1mb

Summary of Gas Utilities Sector Outlook

Core Content

This report provides an outlook on the gas utilities sector in China, focusing on the expected strong demand for natural gas, limited margin pressure, potential winter gas shortages, and the impact on key players such as ENN Energy and China Gas. The analysts maintain an Overweight rating for the sector, citing favorable valuation and growth prospects.

Main Points

• Strong Gas Demand:

  • Gas sales in the first half of 2017 (1H17) were largely in line with market expectations, driven by higher-than-expected volumes.
  • ENN Energy (2688:HK) led in retail gas sales growth with 26.8% YoY (residential: +25% YoY; commercial & industrial: +34% YoY).
  • China Resources Gas (1193:HK) reported 22% YoY growth (residential: +12% YoY; commercial & industrial: +29% YoY).
  • Towngas China (1083:HK) recorded 18% YoY expansion (industrial: +23% YoY; commercial: +19% YoY).
  • National gas consumption growth in August 2017 was 30.4% YoY, significantly higher than the 15.2% YoY in 1H17, indicating robust demand.

• Limited Margin Pressure:

  • Despite concerns about margin pressure from LNG point-to-point supply and direct-gas sales, the analysts believe the potential for further margin squeeze is limited.
  • The average commercial & industrial retail gas price is only 7% higher than current LNG prices, reducing the incentive for end-users to switch to LNG.
  • ENN Energy saw a 10% YoY decline in its gas sales margin to Rmb0.66/m³, while China Resources Gas dropped to Rmb0.64/m³.

• Potential Winter Gas Shortage:

  • The upcoming winter heating season is expected to face supply constraints due to increased demand from coal-to-gas conversions and limited upstream gas supply.
  • PetroChina is anticipated to raise its non-residential city-gate price by 10-15% before winter, following a 10% increase in November 2016.
  • LNG prices are expected to remain high at Rmb4,500-5,000/t in 4Q17E and Rmb4,200/t in 18E, benefiting upstream suppliers.

• Valuation and Recommendations:

  • The sector's average valuation at 14x 18E PE is considered attractive.
  • The analysts recommend Overweight the sector, with ENN Energy as their top pick due to its strong earnings growth and attractive valuation at 13x 18E PE.
  • China Gas (384:HK) is given a Cautious rating due to potential margin pressure on rural residential gas sales and a relatively high valuation at 17x 18E PE.

Key Information

• Gas Sales Growth Expectations:

  • 2H17E: +25% YoY
  • 2017E: +20% YoY
  • 2018E: +15% YoY

• LNG Price Trends:

  • September 2017 LNG price: Rmb3,519/t (up from Rmb2,820/t in September 2016)
  • Expected LNG price in 4Q17E: Rmb4,500-5,000/t
  • Expected LNG price in 18E: Rmb4,200/t

• Impact of LNG Price Increase on China Gas:

  • For every Rmb100/t increase in LNG price, China Gas's FY18E EPS is projected to decrease by 0.7%.

• Key Players and Projects:

  • ENN Energy has a Zhoushan LNG terminal project with phase I expected to start in June 2018, with an annual capacity of 3mt.
  • ENN Energy has 1.4mt in overseas LNG supply contracts at an all-in cost of Rmb2,200-2,400/t, significantly lower than the Rmb3,000/t cost for upstream oil majors.
  • PetroChina, CNOOC, Sinopec, Kunlun Energy, and ENN Energy are expected to benefit from LNG price increases.

Valuation Comparison Table

Conclusion

The analysts remain Overweight on the gas utilities sector, citing strong demand, limited margin pressure, and favorable valuations. ENN Energy is highlighted as the top pick due to its robust earnings growth and attractive valuation, while China Gas is viewed with caution due to potential margin pressures in rural residential gas sales. The report also underscores the importance of LNG price trends and supply constraints in shaping the sector's performance in the coming winter and 2018.