【Company Research】China Gas Holdings (384 HK) – Strong winter gas sales to enhance market confidence

We had an update on winter gas sales with mgmt. recently. CGH read strong gas sales volume during winter heating season, as consolidated project gas sales volume growth reached 30-35% in Dec–Feb. We believe CGH’s winter gas sales performance would likely to outperform peers, and we think that will boost market confidence on earnings to meet or exceed mgmt.’s full year guidance. In view of volatile capital market, we see CGH a defensive pick, and we believe good earnings performance will help market to better realize it. CGH is our top pick of the sector. Maintain BUY with TP unchanged at HK$37.12.

 

  • Strong winter gas sales. According to mgmt., preliminary operating data from consolidated projects indicate 30%/35% gas sales growth volume in Dec/Jan. Mgmt. attributes strong gas volume to 1) township gas consumption with increasing user number; 2) active industrial activities; 3) recovery of commercial business; 4) low base impact due to COVID-19; and 5) cold winter which boosted gas consumption. In Feb–Mar, mgmt. expects gas volume growth to sustain at ~30% on the back of continuing low base. We lift our retail gas projection up by 2.3% to 18.8bcm in FY21E, and we expect FY21E retail gas volume growth to reach 20.3% YoY, exceeding mgmt. guidance of 15% in interim results briefing.

 

  • Government policies reaffirm township infrastructure development. On 21 Feb, China released its rural development policy for 2021. The policy emphasized infrastructure development in rural areas and mentioned about promoting township gas and constructing safe and reliable rural gas storage stations and micro-pipe network gas supply systems. We think CGH once again seizes first mover advantages in micro-pipe network development, and government policy reaffirms the Company’s strategic foresight.

 

  • Cooperation with Sinopec to enhance long term growth prospects. CGH signed framework agreement with Sinopec (386 HK/600028 CH), leveraging each other’s resources and sales network in city gas business, LNG sourcing and import facilities, and LPG industry chain. To CGH, we think key advantage of the agreement would be securing natural gas supply with competitive pricing through Sinopec’s natural gas output and LNG terminals.

 

  • A defensive pick in volatile market. We think recent volatile market will boost market sentiment on gas distributing sector. CGH is our sector top pick. We believe strong gas sales figures in winter will boost market confidence on the Company, while major shareholder Mr.Liu Minghui and Mr. Daniel Chiu’s recent shareholding increase will also enhance market view. Our TP remains unchanged at HK$37.12. Maintain BUY.
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