China Gas Sector: Easing pressure on dollar margin
- Higher gas supply from Russia is positive for gas procurement given the lower prices
- Dollar margin pressure in 4Q is manageable
- Sector trading at -1SD to -2SD of its 2-year historical average after correction of >20% in the past 1.5 months
- Top pick: ENN (2688 HK)
More natural gas from Russia.
Although total natural gas consumption was flat in 7M2022, growth from piped gas was strong. In particular, gas supply from the Power of Siberia jumped >60% during 8M2022. Including LNG imports, Russia is expected to be one of the major gas suppliers to China, accounting for around 15% of total imported natural gas supply in 2022. Not only will gas supply be more stable and diversified, we believe this is also positive for gas procurement as Russian gas is more competitively priced. In fact, the hike in gas cost for this winter is 10-15%, which we reckon is reasonable. We do not expect any issues in cost pass-through in this winter. Extreme weather will be a swing factor.
Dollar margin pressure in 4Q should be manageable.
Amid uncertainty from the Ukraine crisis, dollar margin pressure of gas distributors in 4Q should be manageable because 1) high LNG prices have already deterred demand, prompting users to switch to alternatives; 2) lower percentage of spot LNG transactions and increasing spare capacity in PipeChina’s LNG terminals are other signs that LNG prices have peaked; and 3) contracted volume will be set for residential users to ensure sufficient supply.
Trough valuation of -1SD to -2SD of historical average.
The sector corrected as much as 20% after the interim results announcement. In fact, the sector has underperformed HSI by 9-40% YTD. We reckon uncertainties have been reflected. The sector’s valuation is attractive, trading at a trough of -1SD to -2SD of its historical average. Upcoming catalyst is the National Party Congress to be held in October. Our top pick is ENN because it has the strongest core profit growth with the lowest risk in dollar margin.