China Gas Utilities:Upgrading Kunlun/Towngas to Buy,downgrading China Gas to Hold

类别:投资策略 机构:德意志银行 研究员:Michael Tong 日期:2017-07-31

Focus on laggards: BEHL, Towngas, and Kunlun.

    Sustained volume recovery, policy clarity and positive read-across from theFY17 (Mar yearend) results from China Gas have boosted the gas utilities by15-43% in the past month. We are now more positive about the outlook forvolumes and margins in both near and medium term and therefore raiseearnings for 2017-19E and lift TPs by 21-35%. At the same time, we do notexpect many surprises from interim results and believe that any further reratingwould require much stronger and more sustainable volume growth andadditional policy catalysts. After the strong rally, we downgrade China Gas toHold and recommend laggards including BEHL, Towngas, and Kunlun.

    Recent policies support demand growth and reduce margin concerns.

    Four notices issued recently by the NDRC aim to diversify gas supplies, lowergas prices, and stimulate gas demand, which confirms our expectations setout in Policy roll-out could be intensive in the next few months, 11 May. Thesepolicies bring better sector outlook for a more sustainable demand growthrecovery and fewer risks associated with gas sales margin and connectionfees, which, as we argued before, are the main reason for recent rerating.

    Nationwide policy roll-outs to take a pause, regional executions to follow.

    For the rest of 2017, we expect fewer nationwide policies to be rolled outbesides the potential execution of trunk-line tariff cuts (before end-2017).

    However, we expect more regional notices to be issued aiming to promote gasusage and regulate transmission/distribution margins. These policies should bepositive for gas volume growth but will likely create some margin uncertaintyfor distributors. We model in a mild C&I margin squeeze of RMB3-5cents/cmover 2017-19E, which should be enough to buffer the risks.

    1H17 preview: we expect in-line results for gas distributors.

    We expect gas companies to record 10-20% yoy growth in reported earningsor 5-16% on a recurring basis, generally in line with expectations. Earnings areprimarily driven by robust 13-18% retail volume growth and 5-8% newconnection growth. We forecast gas sales dollar margins to show a slightdecrease yoy on average due to PetroChina’s winter price hike and discountsoffered to large users to stimulate gas usage. See Figure 18 for details.

    Raising earnings on stronger volume growth and less margin squeeze.

    We raise earnings for gas names by 1-19% in 2017-19E to reflect: 1) strongerand more sustainable volume growth; 2) higher new connection growth; and 3)less C&I margin squeeze (RMB3-5cents/cm vs. previously 5-7cents) to reflectmore favorable ROA cap of 7% (vs. 6% in the draft) set by the NDRC.

    Stock recommendations and risks.

    We raise our sector valuations by 21-37%. We derive our TPs based on DCFwith WACC of 7.6-8.3%. We upgrade Towngas to Buy as we see attractivevaluations (10.5x 2018E P/E) considering its improving fundamentals,experienced management and potential privatization possibilities. We upgradeKunlun to Buy as we expect better outlook in both piped gas and LNG segmentand we believe the SJ tariff risks are priced in. We raise our TP but downgradeChina Gas to Hold considering the strong share price rally and elevated marketexpectation. Key risks: lower gas volume/new connection/margins,uncertainties related to local government policies. See fig. 9&10 for details.

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