CITIC SEC: Changes in consumer structure, gas industry back on track with city gas growth moderate.

CITIC SEC released a research report stating that the structure of gas demand has changed due to the increase in gas consumption in the gas and electricity as well as LNG heavy truck sectors. City gas companies benefit less from the increase in gas sales volume brought about by changes in industry demand structure due to differences in customer positioning, and the leading city gas companies show a relatively weak momentum in sales volume growth during this round of recovery. Looking ahead to 2025, with the recovery of traditional demand and the promotion of the "one city, one enterprise" policy, the leading city gas companies may see a moderate acceleration in sales volume growth. Margin improvement and gas volume growth will help city gas companies regain growth in performance, and at the same time, the valuations of leading city gas companies are generally at historical lows, highlighting their cost-effectiveness. Key points from CITIC SEC are as follows: The industry is back on track, but a turning point has appeared in the growth gap between leading city gas companies and the industry as a whole. After two consecutive years of around 8% apparent consumption growth in 2023 and 2024, domestic gas consumption has emerged from a trough, with industry growth returning to normal. Unlike the more prominent historical nationwide growth in city gas sales volume, in this round of demand recovery process, the nationwide leading city gas companies have shown lackluster performance in sales volume growth and are generally weaker than the overall industry growth, indicating a turning point in the growth gap. Changes in consumption structure, significant new demand contributions from transportation and power generation sectors. The current market environment is very favorable for LNG heavy trucks, with sales experiencing a comprehensive outbreak after 2023. As energy transition progresses, the notable increase in flexibility demand from the power system is also boosting gas demand for electricity generation; changes are occurring in end-use sectors, leading to gas consumption growth. The report estimates that in 2024, gas consumption growth driven by gas-heavy trucks and gas power generation will reach 17.7 billion cubic meters, accounting for 56% of the total annual gas consumption growth. At the same time, LNG heavy trucks and gas power generation are generally not customers of leading city gas companies, so their high demand for gas will have limited impact on the sales volume growth of leading city gas companies. Industry demand is still capable of high growth, and the trend of city gas consumption recovery may accelerate. The sustained high growth in demand from LNG heavy trucks and gas power generation, coupled with a mild recovery in traditional demand, is forecasted to achieve a 7.1% high growth in domestic gas consumption in 2025. The growth rate of the nationwide leading city gas companies' sales volume may continue to lag behind the industry volume growth, but with the promotion of the "one city, one enterprise" policy and the resurgence of economic growth momentum helping to boost the demand for traditional industrial gas sectors, the growth rate of leading city gas companies' sales volume may see a certain acceleration. City gas companies regain growth momentum, with valuation safety margins standing out. As international gas prices fall, PetroChina has also synchronously reduced sales gas prices, reducing the purchasing costs for city gas enterprises. Price adjustment policies in many provinces and cities are gradually implemented, pushing up prices, which is helping to generally increase the gross profit margin of leading city gas companies in the first half of 2024 by 3-6 cents. Leading city gas companies' current valuations are generally at historically low levels, with valuation safety margins standing out. Investment strategy: With the recovery in demand, gross profit margin improvement, and limited marginal impact from declining connections, leading city gas companies are returning to growth momentum, coupled with valuations generally at multi-year historical lows, presenting outstanding investment value at the current juncture. Three main themes are recommended: nationwide leading city gas companies benefitting from declining gas prices, gross profit margin improvement, and significant valuation safety margins; regional leading city gas companies with scarce midstream pipeline assets or high-quality operating regions; and natural gas trading companies with proprietary gas sources or transportation advantages that drive overseas business development. Risk factors: Risk of slowing growth in natural gas demand; risk of significant increases in natural gas prices; risk of slower-than-expected progress in price adjustments policies; risk of unexpected delays in business expansion.