Investing.com -- The outlook for gas utility stocks in China appears increasingly favorable following the country’s recent stimulus measures.
“China has started to take measures to boost its economy with a 50bps cut in RRR and measures to support the property market including a cut to mortgage rates and reduction in down payment on second homes,” said analysts from Bernstein in a note.
These government actions are expected to directly benefit gas utility companies, which have already shown resilience in gas demand growth throughout 2024.
Bernstein flagged that natural gas demand in China grew by 9% year-on-year during the first half of 2024, with gas distributors like Kunlun, Towngas, and China Resources Gas seeing solid volume growth.
Despite some sluggishness in China Gas’s year-to-date growth, which was weaker than expected, the broader sector has performed well, driven by both increased consumption and stable volume growth rates.
The Chinese government's economic support, alongside a wave of new global LNG supply expected in 2025 and 2026, presents a significant tailwind for gas utilities.
Bernstein forecasts that China will be in a gas surplus by 2025, aided by increased imports from Russia and LNG supply, which should lower gas costs and improve dollar margins for utility companies.
The cost pass-through improvements already noted in 2024 are expected to bolster gross margins further in 2025, benefiting downstream gas utilities.
Although the property sector has been a headwind, with a 20% decline in year-to-date residential building sales, this has been partially offset by strong growth in extended businesses like value-added services and integrated energy solutions.
For instance, ENN and CR Gas have seen strong profit growth from these segments, a trend likely to continue into 2025 as gas utilities diversify their revenue sources.
Despite challenges such as declining connection fees due to the property market's slowdown, the sector remains attractively valued, with gas utility stocks trading at historically low multiples, around 8 times forward price-to-earnings ratios—well below the historical average of 13 times.
This undervaluation, combined with expectations of earnings growth acceleration in 2025, makes gas utility stocks a compelling investment.
Bernstein's top picks for this sector are ENN and CR Gas, both rated “outperform” due to their high-quality customer bases and better-managed gas supply sources.
These companies are well-positioned to take advantage of the upcoming gas surplus and the growth in ancillary services. On the other hand, Kunlun Energy and Towngas are expected to see more muted growth, with Bernstein maintaining a "market-perform" rating for both.
Overall, the outlook for China’s gas utility stocks is optimistic as they stand to benefit from both domestic economic stimulus and favorable global supply dynamics.