Investing.com — The outlook for gas companies in China appears increasingly bright following the country’s recent stimulus measures.
“China has started taking measures to stimulate its economy with a 50 basis point cut in the RRR and measures to support the real estate market, including a cut in mortgage rates and a reduction in down payments on second homes,” analysts said from Bernstein.
These government actions are expected to directly benefit gas companies, which have already shown resilience in gas demand growth in 2024.
Bernstein noted that demand in China grew 9% year-on-year in the first half of 2024, with gas distributors such as Kunlun, Towngas and China Resources Gas seeing solid volume growth.
Despite some slowdown in China Gas growth this year, which was weaker than expected, the broader sector has performed well, driven by both increased consumption and stable volume growth.
The Chinese government’s economic support, alongside a wave of new global LNG supplies expected in 2025 and 2026, represents a significant tailwind for gas companies.
Bernstein predicts China will have a gas surplus by 2025, helped by increased imports from Russia and LNG supply, which should lower gas costs and improve dollar margins for utilities.
The improvements in cost pass-through already noted in 2024 are expected to further strengthen gross margins in 2025, benefiting downstream gas companies.
Although the real estate sector faced headwinds, with a 20% decline in residential building sales since the start of the year, this was partially offset by strong growth in expanded businesses such as value-added services and integrated energy solutions.
For example, ENN and CR Gas have seen strong earnings growth in these segments, a trend that is likely to continue into 2025 as gas companies diversify their revenue sources.
Despite challenges such as falling connection costs due to the real estate market slowdown, the sector remains attractively valued, with gas company shares trading at historically low prices, around eight times forward price-to-earnings ratio – well below the historical average of thirteen times.
This undervaluation, combined with expectations of an acceleration in earnings growth in 2025, makes gas company shares an attractive investment.
Bernstein’s top picks for this sector are ENN and CR Gas, both of which are rated ‘outperform’ due to their high-quality customer base and better managed gas supply sources.
These companies are well positioned to benefit from the coming gas surplus and the growth of support services. On the other hand, Kunlun Energy and Towngas are expected to see more moderate growth, with Bernstein maintaining a ‘market perform’ rating on both.
Overall, the outlook for Chinese gas companies is optimistic as they will benefit from both domestic economic stimulus and favorable global supply dynamics.
