What Is the Outlook for Gas Utility Stocks Following China’s Stimulus?

The outlook for gas utility stocks in China is becoming increasingly positive following recent stimulus measures introduced by the government.

Analysts from Bernstein noted that China has implemented strategies to invigorate its economy, such as a 50 basis point reduction in the reserve requirement ratio (RRR) and initiatives to bolster the property market, including lowering mortgage rates and reducing down payments for second homes.

These government actions are set to directly benefit gas utility firms, which have demonstrated resilience in gas demand growth throughout 2024. Bernstein highlighted that natural gas demand in China increased by 9% year-on-year in the first half of 2024. Gas distributors like Kunlun, Towngas, and China Resources Gas have experienced robust volume growth.

While there has been some sluggishness in China Gas’s growth this year, which was lower than anticipated, the broader sector has performed well due to rising consumption and stable growth rates.

The support from the Chinese government, along with an influx of new global liquid natural gas (LNG) supply expected in 2025 and 2026, is a significant boost for gas utilities. Bernstein predicts that China will achieve a gas surplus by 2025, aided by increased imports from Russia and LNG supplies, which should reduce gas costs and enhance profit margins for utility companies.

Improved cost pass-throughs noted in 2024 are expected to further strengthen gross margins in 2025, benefiting downstream gas utilities. Although the property sector has faced challenges, with a 20% decrease in year-to-date residential building sales, this has been somewhat countered by strong growth in extended services, such as value-added offerings and integrated energy solutions.

Businesses like ENN and CR Gas have reported notable profit growth in these areas, a trend likely to continue into 2025 as gas utilities diversify their revenue streams. Despite issues like declining connection fees caused by the slowdown in the property market, the sector remains attractive, with gas utility stocks trading at historically low multiples of around eight times forward price-to-earnings ratios—significantly below the historical average of thirteen times.

This undervaluation, coupled with expectations for accelerated earnings growth in 2025, positions gas utility stocks as an appealing investment opportunity. Bernstein’s top picks for the sector include ENN and CR Gas, both rated “outperform” for their strong customer bases and well-managed gas supply sources.

These firms are strategically positioned to capitalize on the anticipated gas surplus and the rise of ancillary services. Conversely, Kunlun Energy and Towngas are expected to experience more tempered growth, with Bernstein maintaining a “market-perform” rating for these companies.

Overall, the outlook for China’s gas utility stocks is optimistic, as they are poised to gain from both domestic economic stimulus initiatives and favorable global supply conditions.