CMSC: Gas Prices Fall + Price Adjustment Leads the Way, Turning Point in Urban Gas Profitability Has Been Reached.

CMSC released a research report stating that under the drive of the "dual carbon" goal, it is expected that natural gas demand will peak between 2030-2040, with an incremental space of 2000-3000 billion cubic meters compared to the 394.5 billion cubic meters in 2023. Domestically, the production and economy of unconventional natural gas are expected to continue to improve and become an important part of China's future natural gas supply; and it is also predicted that LNG imports in China will continue to grow in the future. Additionally, due to the lagging nature of natural gas sales price adjustments, in the context of overall downward trend in upstream gas prices, city gas companies are expected to achieve excess margin restoration. The main points of view of CMSC are as follows: Accelerated energy transformation, vast space for natural gas substitution Compared to developed countries, the current natural gas consumption in China is still relatively low. Under the drive of the "dual carbon" goal, it is expected that natural gas demand will peak between 2030-2040, with an incremental space of 2000-3000 billion cubic meters compared to the 394.5 billion cubic meters in 2023. The characteristics of the domestic natural gas industry chain are as follows: the upstream gas supply is basically monopolized by the "three barrels of oil," with the proportion of LNG imports gradually increasing; the midstream gas transmission is coordinated by the national pipeline network construction, creating a "national network," and the downstream gas use mainly includes industrial use and urban gas use, with city gas competition being dispersed, and due to the government's price control on gas distribution, city gas companies have limited pricing space and lower profit margins. Upcoming production of overseas gas fields is expected to bring downward pressure on gas prices and an increase in demand China's proven natural gas reserves and production are mainly distributed in western regions, while the demand for industrial, commercial, and residential natural gas in southeastern coastal cities is greater, leading to significant regional supply-demand imbalances. Insufficient pipeline transmission channels and gas storage further restrict capacity upgrades, leading to long-term natural gas production growth rates being lower than consumption growth rates, and China's external dependence on gas continues to increase. On the supply side, with exploration and development expanding and engineering technology advancing, the production and economy of unconventional natural gas are expected to continue to improve and become an important part of China's future natural gas supply. In terms of imported pipeline gas, with the gradual production of the Central Asia Natural Gas Pipeline and the West-to-East Gas Pipeline, it is expected that China's pipeline gas imports will continue to grow; in terms of LNG, multiple LNG projects in the United States, Canada, Qatar, and other countries are expected to come online between 2025-2027, further increasing global LNG supply capacity and potentially leading to lower gas prices. With various factors such as the increasing demand for transportation energy, improved receiving station capacities, increased demand for terminal tanks and peak shaving, it is expected that China's LNG imports will continue to grow in the future. On the demand side, with gas prices decreasing, natural gas demand is gradually picking up, and the price comparison between LNG and diesel has decreased to around 0.7, further enhancing economic viability and increasing substitution effects. Additionally, as social security awareness increases, demand for programs such as "coal to gas" and "bottled gas to piped gas" is expected to bring significant additional demand. Price mechanism being gradually unblocked, prospect of profit restoration for city gas Starting in 2022, international natural gas prices have risen sharply, and due to the unsmooth cost transmission mechanism, in 2022, the gross profit margin of China's city gas companies has generally narrowed. CHINA RES GAS, KUNLUN ENERGY, CHINA GAS HOLD, ENN ENERGY, TG SMART ENERGY saw a year-on-year decrease in gross profit margins by 0.07/0.02/0.08/0.03/0.01 RMB per cubic meter, respectively. Since 2023, the central price of international gas has fallen, and many regions across the country have initiated or established a price linkage mechanism between upstream and downstream natural gas prices, resulting in a general increase of residential gas prices by about 0.2-0.3 RMB per cubic meter, which has led to improvements in profit margins for city gas companies. In 2023, CHINA RES GAS, CHINA GAS HOLD, ENN ENERGY, and TG SMART ENERGY saw a year-on-year increase in gross profit margins by 0.06/0.08/0.02/0.01 RMB per cubic meter, respectively. Due to the lagging adjustments in natural gas sales prices and the overall downward trend in upstream gas prices, the gross profit margin of city gas companies is expected to receive excess restoration. Risk warning: safety operational risks, risks in gas source acquisition and price fluctuations, lower-than-expected downstream demand, etc.