Daiwa Revises Outlook for China's Natural Gas Sector to Neutral, Expects Better Fundamentals by 2026

The analyst rating for TG SMART ENERGY is maintained as a "Buy" despite a reduction in the target price from HKD 4.7 to HKD 4. This decision is based on the expectation that retail gas sales will remain stable in the second half of 2025, and while the number of new users is projected to decrease by 16% year-over-year in 2025, gas sales in Hong Kong are anticipated to stay solid. Additionally, a gas price hike in August 2024 is expected to support sales volume. However, the earnings forecasts for TG SMART ENERGY have been lowered by 6-7% for 2025-27 due to a reduced contribution from the renewable energy business.

The analyst rating for HK & CHINA GAS was upgraded from Hold to Outperform due to an improvement in fundamentals driven by the recovery of earnings in its green fuel business. This positive outlook is supported by the anticipated recovery of sustainable aviation fuel prices and the addition of new capacity, which is expected to lead to a turnaround in the company's performance in the second half of 2025. Additionally, the restructuring and potential spin-off of its subsidiary EcoCeres after 2026 is expected to provide room for increased dividends per share. The target price was also raised from HKD7.1 to HKD7.7.

Citi Research lowered its earnings forecasts for HK & CHINA GAS (00003.HK) for 2025-2027 by 2-5% primarily due to a reduced contribution forecast from its subsidiary, TG SMART ENERGY (01083.HK), and anticipated foreign exchange losses from the appreciation of CNY/HKD. Despite this revision, the broker maintained a target price of $7 and a Neutral rating, as the adjustments to the earnings forecast were relatively mild. Additionally, Citi's 2025 earnings forecast for HK & CHINA GAS is 8% lower than market consensus, with expectations of a 2% year-over-year decline, even when excluding foreign exchange impacts. The broker noted that investors are particularly concerned about the company's dividend, which is expected to remain at $0.35, yielding 5%.