CHINA GAS SECTOR:Looking forward to 2H15

Disappointing 4M15 apparent gas consumption growth;expect it to pick up towards end of 2Q15. China’s apparent gasconsumption posted disappointing growth of 2.4% for 4M15, withApril standalone declining 5.9% YoY. City gas volume has beenslowing along with overall gas consumption in 4Q14-1Q15 in viewof (1) higher city gate prices after 1 September 2014, (2) lower oilprices, (3) slowing economic activity, and (4) warmer weather. Majorplayers including, ENN Energy (2688 HK, N), CR Gas (1193 HK, N)and China Gas (384 HK, OP) have been experiencing high singledigitto low-teen volume growth in 4M15. Industry players areexpecting a gradual pickup in volume as early as May 2015 oncelower city gate prices come into effect. A further cut in city gateprices in 2H15 would also stimulate demand.

Possible slight dollar margin expansion. Gas operators arepassing through the 1 April city gate price cut to end users albeit at aslower pace than they would have done in the event of a price hike.This may result in slight dollar margin expansion towards the end of2Q15F. Further margin expansion would become more likely if2H15F brings another round of gate price cuts.

Uninspiring 1H15 numbers; looking forward to 2H15-1H16.Share prices of China’s gas utilities names have been trading indifferent directions YTD. On average, the sector slightlyunderperformed the HSCEI. We expect the gas operators to reportlackluster volume figures for 1H15F and a more meaningful city gateprice cut in September-October this year. With this in mind, 2H15Fmay be a better entry point. Our top picks are China Gas (384 HK,OP) on higher-than-peer volume growth and Beijing EnterprisesHoldings (392 HK, OP) due to its resilience in an environmentfraught with volume and gas connection risk.