20171127-招商证券_香港_-Industry_Report_48页_1mb

Industry Report Summary: Gas Sector in China

Core Content

This report highlights the positive outlook for the gas sector in China, recommending China Gas (384 HK) and ENN Energy (2688 HK) as top picks. The sector is expected to benefit from accelerating gas demand growth, access to low-cost gas sources, and the removal of regulatory uncertainties.

Main Views

• Positive Outlook: The gas sector is viewed as a strong investment opportunity due to its long-term growth potential, driven by government policies promoting natural gas usage and market liberalization.
• Earnings Growth: City gas operators are forecasted to achieve 14–23% CAGR in recurrent EPS from 2017 to 2019, with China Gas expected to lead at 23% and ENN Energy at 18%.
• Valuation: The report uses DCF-based valuation and highlights that China Gas and ENN Energy are undervalued relative to their growth potential.
• Market Liberalization: While it introduces competition, it also opens up opportunities for gas companies to access cheaper gas sources and expand their market share.
• Government Policies: The government's coal-to-gas conversion program and natural gas usage plan are key drivers of demand, aiming to increase the share of natural gas in the energy mix from 6.4% in 2016 to 15% by 2030.

Key Information

Growth Drivers

• Coal-to-Gas Conversion: Especially in Northern China, which is expected to boost gas sales and connection fees.
• Residential Gas Usage: Expansion of natural gas applications in households, such as dryers and heaters, increases residential gas consumption.
• LNG Imports: Early engagement in LNG import business gives companies a competitive edge in the liberalized market.
• Government Support: Policies such as capping ROA at 7% and excluding connection fees from regulated assets reduce regulatory risks.

Investment Thesis

• The gas sector is expected to outperform in the long run despite short-term volatility.
• The 15% CAGR in gas demand over the next four years will benefit companies with strong exposure to fast-growing provinces.
• China Gas and ENN Energy are highlighted due to their aggressive expansion, strong market positions, and diversified services.

Catalysts and Risks

Near-term Catalysts

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

Downside Risks

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

Financial Highlights

Note: 2017–18E refer to fiscal years ended 31 Mar 2018–19E for China Gas

Valuation Methodology

• DCF-based valuation is used, with WACC and terminal growth rate as key inputs.
• China Gas has a WACC of 8.7% and a terminal growth rate of 3.3%.
• ENN Energy has a WACC of 8.5% and a terminal growth rate of 3.2%.

Investment Recommendations

• China Gas is recommended as BUY due to its aggressive rural expansion and high-margin value-added services.
• ENN Energy is also recommended as BUY due to its strong presence in Northern China and early LNG import initiatives.
• CR Gas is given a NEUTRAL rating due to its focus on mature markets and lower growth expectations.

Conclusion

The gas sector in China is expected to deliver double-digit earnings growth due to strong demand from coal-to-gas conversion, residential gas usage, and market liberalization. Companies with a strong growth profile, such as China Gas and ENN Energy, are highlighted for their potential to outperform, while CR Gas is seen as less attractive. The report emphasizes the importance of operational performance and policy developments in driving future returns.