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www.bernsteinresearch.com BERNSTEIN TICKER TABLETickerRating384.HK (China Gas)MOLD1193.HK (China Resources)MOLDO2688.HK (ENN Energy)OOLD135.HK (Kunlun Energy)OOLD1083.HK (Towngas China)MOLDASIAXRATING CHANGE / PRICE TARGET CHANGE / ESTIMATE CHANGE IN BOLDO - Outperform, M - Market-Perform, U - Underperform, NR - Not Rated, CS - Coverage SuspendedSource: Bloomberg, Bernstein estimates and analysis.INVESTMENT IMPLICATIONSChina gas demand is surprising on the downside. Despite our forecast of 6% gas demand growth at the start of the year, 1Q25demand was flat to negative on a sluggish industrial economy and warm winter. Consequently, we think that growth may onlyreach 4% this year and have lowered our EPS forecasts accordingly. This comes at a time when LNG volumes are set to growrapidly over the coming 3 years, with a larger number of projects in Qatar, Canada, and the U.S. starting up. We think this will bepositive for China gas distributors, given China’s role as the world's largest LNG importer, but clearly more patience is required.Despite lower growth, the street expectations for the sector remain undemanding (forward P/E 7-8x). We think there is clearlong term upside in the sector with gas demand likely to accelerate to 7-8% CAGR over the coming 3 years. We prefer ENN andKunlun Energy which have high FCF yield and dividend yield. We downgrade CR Gas to Market Perform given a more significantimpact to growth this year (estimates cut while WACC unchanged). We remain Market-Perform on Towngas and China Gas. Wealso cut our estimates (resulting in lower PTs while WACC unchanged) for Kunlun (HKD9.5) and China Gas (HKD6.8) due to aless favorable outlook on margins.ASIA-PACIFIC GAS DISTRIBUTORS 2 VALUATION COMPS TABLEEXHIBIT 1:China gas distributors comparison tableRatingCURTP19-MayENNOHKD70KunlunOHKD9.5China GasMHKD6.8CR GasMHKD24Towngas ChinaMHKD3.3AverageRatingCURLTMRel LTM%ENNOHKD-6%KunlunOHKD3%China GasMHKD2%CR GasMHKD-12%Towngas ChinaMHKD23%Average2%RatingCURLTMHighENNOHKD79.6KunlunOHKD9.2China GasMHKD8.4CR GasMHKD35.2Towngas ChinaMHKD3.7AverageChina Gas for FY+1 (CY), i.e. 2024E = FY2025Source: Bloomberg, Bernstein estimates and analysisASIA-PACIFIC GAS DISTRIBUTORS DETAILSWe maintain a positive outlook on Chinese gas distributors. While the ongoing weakness in the property market and China'seconomic slowdown have impacted distributors' earnings, the effects are diminishing. The Chinese government has begunimplementing measures to stimulate the economy, even in the face of new U.S. tariffs. More significantly, we anticipate thatthe global gas supply squeeze will conclude by 2025, positioning downstream gas utilities to benefit from increased globalgas availability and declining prices. After several years of gas shortages, we expect a substantial surge in supply over the nextthree years, which will likely be absorbed by Asian markets, particularly China. Although China's industrial growth may pose achallenge to demand, the reduction in gas prices should encourage a shift toward gas as a preferred fuel. Additionally, factorssuch as increased LNG supplies, a resolution to the Russia-Ukraine conflict, or a trade agreement with China could furtherenhance gas imports into the country.OUR RATINGS IN CHINA GAS DISTRIBUTORS SECTORWe downgrade CR Gas from Outperform to Market-Perform, setting a price target of HKD24. The company's 2024 results weredisappointing, leading us to find ENN and Kunlun more appealing at current valuation multiples.We expect CR Gas's earnings to grow by 5.7% in 2025, which lags behind our projected growth rates of ENN and Kunlun (seeExhibit 5). CR Gas has guided for a retail gas sales volume growth of 4%-5% and a margin improvement of RMB0.01/cm.However, the impact of U.S. tariffs poses additional downside risks to CR Gas's industrial gas sales volume growth. Notably, theconnections fee business, which accounted for 23% of CR Gas's total profit—the second highest among the gas distributors wecover—is likely to continue constraining earnings growth in 2025 (Exhibit 3).Currently, CR Gas is trading at a P/E ratio of 11.5x for 2025, with a projected earnings growth of 5.7%. This valuation appearsless attractive compared to ENN and Kunlun, which are trading at 9x P/E with a double-digit earnings growth outlook (seeExhibit 9). Furthermore, CR Gas reduced its dividend in 2024, resulting in a dividend yield of only 4.2%, the lowest amongChinese gas distributors (see Exhibit 26). Although the company has indicated an intention to increase its payout ratio in 2025,we prefer Kunlun and ENN due to their superior earnings growth potential and clearer plans for improving payout ratios.EXHIBIT 2:Our top picks in China Gas Utility sector are ENN and Kunlun which we rate as Outperform. We rate CRGas, China Gas and Towngas as Market-PerformSource: Bloomberg and Bernstein estimates and analysisASIA-PACIFIC GAS DISTRIBUTORS ENNKunlunEnergyChina GasCR GasTowngasChinaBernstein target price, HKD70.09.56.82