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Barron's: China’s Gas Stock Rally Still Has Plenty of Energ

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    Relevant article.

    http://www.barrons.com/articles/chinas-gas-stock-rally-still-has-plenty-of-energy-1498724098

    China’s Gas Stock Rally Still Has Plenty of Energy
    By
    Adam Routh
    June 29, 2017 4:14 a.m. ET

    Shares in China's gas distributors have rallied more than 30% in recent weeks as the government pushes towards the use of gas instead of coal.

    Jefferies analysts Howard Lau and Laban Yu expect this rally to continue and say demand growth can easily exceed 15% this year:

    Demand growth over the last three months averaged 19.5% driven by coal to gas conversion for industrial usage. We believe YTD demand growth of 14% was suppressed by an abnormally warm winter. Given a normal winter this year (e.g. easy comps in Dec), we believe demand growth can comfortably hit >15% in 2017.
    The analysts say natural gas consumption in China is in its early stages and has plenty of room to grow. The Chinese government is targeting to increase natural gas consumption to 10% from the current 6% by 2020, while urban penetration at around 40% is far from saturated:

    We forecast China’s natural gas demand to grow at a CAGR of 13% in 2016-2020E, accelerating from the 3%/7% growth we saw in the last 2 years, mainly driven by coal to gas conversion demand.
    Given the expected demand growth over the next few years and favorable government policy (see Why China’s Gas Stocks Are Rising), Jefferies continue to like pure play gas distributors with its preferred picks being China Gas (384.HK) and ENN Energy (2688.HK). The broker has a buy rating on China Gas with an increased target price of HKD18.4 a share (from HKD15.4), implying 16% upside from the current price. It has a buy rating on ENN Energy and a new price target of HKD53 a share (from 47), implying 12% upside.

    Here's why it likes China Gas:

    We forecast China Gas to record 21% core earnings growth for FY17-20E, the fastest growing gas distributor in our coverage, thanks to its rural development strategy. We revise up our estimates by around 20% for FY18/19 to reflect higher sales volume and connection fee, partially incorporating the aggressive guidance announced last week.
    Here's why it likes ENN Energy:

    We like ENN for being the leading gas distributor in Hebei, benefiting from coal to gas demand growth. We also like ENN's preparation for 3rd party access in the future. We revise up our estimates by 6% for 2017/19 to reflect higher sales volume and connection fee and increase our PT from HK$47 to HK$53, valuing the company at 14.5x forward earnings, slightly below its historical average.
    Shares in China Gas are up 51% this year and are currently trading at their highest since June 2014. ENN Energy is up 48% year-to-date and are currently trading at HKD47.25, the highest since April 2016.
 
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