What’s the outlook for gas utility stocks after China’s stimulus By Investing.com

Investing.com — The outlook for China’s gas stocks is looking increasingly favorable following the country’s recent stimulus measures.

“China has started to take steps to boost its economy with a 50bp cut in RRR and measures to support the housing market, including a reduction in mortgage rates and downpayments for second homes,” Bernstein analysts said in -a note.

These government actions are expected to directly benefit gas utilities, which have already shown resilience in rising gas demand throughout 2024.

Bernstein signaled that Chinese demand rose 9% year-on-year in the first half of 2024, with gas distributors such as Kunlun, Towngas and China Resources Gas posting solid volume growth.

Despite some weaker-than-expected China Gas growth pace year-to-date, the broader sector performed well, driven by both consumption growth and steady volume growth rates.

Economic support from the Chinese government, along with a wave of new global LNG supplies expected in 2025 and 2026, presents a significant tailwind for gas utilities.

Bernstein projects that China will have a gas surplus by 2025, helped by increased Russian imports and LNG supplies, which should lower gas costs and improve dollar margins for utilities.

Cost pass-through improvements already seen in 2024 are expected to further boost gross margins in 2025, benefiting downstream gas utilities.

Although the real estate sector was a headwind, with a 20% decline in residential building sales since the start of the year, this was partly offset by strong growth in extended businesses such as value-added services and integrated energy solutions .

For example, ENN and CR Gas have seen strong profit growth in these segments, a trend that could continue into 2025 as gas utilities diversify their revenue streams.

Despite challenges such as lower connection fees due to the housing slowdown, the sector remains attractively valued, with gas utility shares trading at historically low multiples of around 8 times forward price-earnings ratios – well below the historical average of 13 times.

This undervaluation, combined with expectations of accelerating earnings growth in 2025, make gas stocks a compelling investment.

Bernstein’s top picks for the sector are ENN and CR Gas, both rated “outperform” due to high-quality customer bases and better managed gas supply sources.

These companies are well positioned to take advantage of the future gas surplus and growth in ancillary services. On the other hand, Kunlun Energy and Towngas are expected to see lower growth, with Bernstein maintaining a “market perform” rating on both.

Overall, the outlook for China’s gas stocks is bullish as they stand to benefit from both domestic economic stimulus and favorable global supply dynamics.