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Morningstar | China Resources Gas Reports Strong 2018 Volume Growth with Dollar Margin Improvement

Narrow-moat China Resources Gas’, or CRG’s, 2018 net profit of HKD 4.45 billion, up 22% year over year, was within our expectation. We increase our fair value estimate to HKD 40.00 from HKD 38.00, after fine-tuning and rolling forward our earnings model. In addition, we also reduce our uncertainly rating for CRG to medium from high, as earnings from more stable recurring natural gas sales have overtaken those from one-off gas connection fees. Going forward, we believe CRG will be less affected by policy risk if connection fees are no longer allowed or reduced. We also think CRG is attractive at its current price level given its robust five-year earnings CAGR of 10%.

CRG’s 2018 natural gas sales volume rose 23% year over year, slightly above our expectation and in line with strong growth witnessed by peer, ENN Energy. Meanwhile, CRG also reported new residential connections of 3.2 million, in line with our projection. We think both CRG and ENN have benefited from favorable clean energy policies by the government. In particular, the firm’s dollar margin per cubic meter improved to CNY 0.60 from CNY 0.58 a year ago, due to increased sales to higher margin industrial customers and recovery from a low base.

Going forward, management guided that natural gas sales volume should grow at least 20% year over year in 2019 while new residential connections should stay around 3 million. More importantly, the firm is guiding for stable dollar margin outlook, similar to ENN Energy’s guidance. We expect dollar margin of CNY 0.59 for 2019 as we expect some delay in cost pass-through by CRG. Nonetheless, we think CRG’s sales and connections targets are realistic given that CRG’s penetration rate of 50.3% as at end-2018, is one of the lowest among its peers.

Similar to peers, CRG is also exploring new business opportunities such as distributed energy projects, midstream pipeline and electric charging posts to diversify its earnings.

The firm expects capital expenditure to increase to about HKD 7.3 billion in 2019 (including funding for mergers and acquisitions), from about HKD 5.8 billion in 2018. We believe management will remain conservative when evaluating new projects. While not significant, we are glad that CRG’s charging posts business (for electric public bus) is already generating operating profit of about HKD 16.4 million in 2018.