CRG (1193 HK): Beneficiary of China’s Shift to Gas

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

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Equity Bottom-Up

Narrow-moat China Resources Gas’, or CRG’s, 2016 net profit of CNY 3.29 billion was within our expectations, and we leave our earnings forecasts unchanged. Despite flat revenue, earnings rose 16% year over year, as a larger percentage cut in city-gate gas costs versus the tariff cut lifted the gross margin. After rolling forward our valuation model, we raise our fair value estimate to HKD 31.00 from HKD 27.50. We think CRG remains undervalued at the current price level.CRG benefited from a recovery in natural gas demand, with the 2016 natural gas sales volume rising 15% year over year. In particular, the commercial sector registered the fastest growth of 31%; meanwhile, similar to its peers, gas station sales volume was relatively weaker at 6% due to competition from electric vehicles and lower oil prices. Management is guiding sales volume growth of at least 15% for 2017, and volume growth for the first two months of 2017 was strong at 16% year over year. We believe the guidance is achievable, and in addition to rising commercial sector gas consumption, we expect increasing environmental protection policies in China to accelerate industrial demand on the back of intensifying “coal-to-gas” conversion.Meanwhile, CRG’s new residential connections of 2.7 million in 2016 exceeded our estimate of 2.5 million, thanks to the firm’s efforts to focus on old residential households and increasing affordable housing construction by the government. We believe the new residential connections will remain sustainable at the current pace, as CRG’s penetration rate at 46% as at year-end 2016 is one of the lowest among its peers. We also expect the connection gross margin to stay at 59.8% for the next five years.Analyst: Chokwai Lee

Narrow-moat China Resources Gas’, or CRG’s, 2016 net profit of CNY 3.29 billion was within our expectations, and we leave our earnings forecasts unchanged. Despite flat revenue, earnings rose 16% year over year, as a larger percentage cut in city-gate gas costs versus the tariff cut lifted the gross margin. After rolling forward our valuation model, we raise our fair value estimate to HKD 31.00 from HKD 27.50. We think CRG remains undervalued at the current price level.CRG benefited from a recovery in natural gas demand, with the 2016 natural gas sales volume rising 15% year over year. In particular, the commercial sector registered the fastest growth of 31%; meanwhile, similar to its peers, gas station sales volume was relatively weaker at 6% due to competition from electric vehicles and lower oil prices. Management is guiding sales volume growth of at least 15% for 2017, and volume growth for the first two months of 2017 was strong at 16% year over year. We believe the guidance is achievable, and in addition to rising commercial sector gas consumption, we expect increasing environmental protection policies in China to accelerate industrial demand on the back of intensifying “coal-to-gas” conversion.Meanwhile, CRG’s new residential connections of 2.7 million in 2016 exceeded our estimate of 2.5 million, thanks to the firm’s efforts to focus on old residential households and increasing affordable housing construction by the government. We believe the new residential connections will remain sustainable at the current pace, as CRG’s penetration rate at 46% as at year-end 2016 is one of the lowest among its peers. We also expect the connection gross margin to stay at 59.8% for the next five years.Analyst: Chokwai Lee

China Resources Gas' 2016 Results Underpinned by Robust Volume Growth; Shares Remain Undervalued

CR Gas

China Resources Gas' 2016 Results Underpinned by Robust Volume Growth; Shares Remain Undervalued