China Resources Gas Earnings: Results in Line but Near-Term Headwinds Will Limit Upside

Narrow-moat China Resources Gas’ 01193, or CRG’s, first-half 2023 net profit was up 16.4% year on year to HKD 3.55 billion. Stripping out the gain from the disposal of an associate, the results were broadly within our expectations, but we expect a mixed market reaction with CRG lowering sales guidance. We cut our 2023-25 earnings estimates by 1.9%-7.1% after incorporating the latest operating statistics and depreciation of the Chinese yuan, and lower our fair value estimate to HKD 32.00 from HKD 33.50. We think CRG is undervalued currently, with shares trading at about 5% estimated dividend yield for 2023 and 9 times 2023 P/E as of Aug. 25 closing, which is the lower end of the five-year historical trading range of around 7 times to 19 times. Nonetheless, we believe the slowdown in the property sector will continue to weigh on CRG’s near-term share price performance.

Due to the slowdown in the domestic economy and real estate sector, CRG management cut full-year 2023 volume growth guidance to 7%, from double digits, with new residential connections target lowered to around 3.0 million to 3.5 million, from 3.5 million. The gas sales target is still better than ENN Energy’s guidance of a 5% drop for 2023. Meanwhile, the 2023 dollar margin guidance of CNY 0.50 per cubic meter is in line with ENN Energy’s target. CRG thinks there is further upside to the dollar margin with improving cost pass-through although management sees uncertainty on gas prices during the winter season.

CRG’s first-half gas sales volume growth was 6.9% year on year, better than ENN Energy’s negative 6.9%. In addition, dollar margin recovered to CNY 0.50 from CNY 0.45, a year ago, with more than 50% of gas sales to the residential segment completed cost pass-through. CRG’s new residential connections fell 21.7% year on year to 1.3 million but we assumed it would be able to meet our full-year estimate of 3.0 million.