Broker: UOB Kay Hian
Date of Report: Friday, 29 August 2025
China Resources Gas (1193 HK): Resilience and Opportunity Amidst Sector Headwinds – UOB Kay Hian Upgrades to BUY

Overview: China’s Leading Gas Distributor Navigates a Challenging Landscape

China Resources Gas Group Ltd (CR Gas), the largest gas distributor in China by household connections, has demonstrated resilience amid sector-wide challenges in its interim 2025 results. The company, with 248 city gas projects spanning 22 provinces, is strategically positioned to capitalize on China’s urbanization trend. Despite short-term earnings pressure, management’s guidance and sector trends suggest upside potential for investors seeking defensive plays in the utility space.

Key Investment Summary

• Recommendation: Upgraded to BUY
• Target Price: HK\$22.60 (previously HK\$26.00), representing an 18.6% upside from current levels
• Share Price: HK\$19.05
• Market Cap: HK\$44,081.9 million (US\$5.65 billion)
• Major Shareholder: China Resources (Holdings) – 60.8%
• Sector: Utilities

1H25 Financial Performance: In-Line Despite Industry Headwinds

CR Gas reported 1H25 core earnings of HK\$2,403 million, a decline of 30.5% year-over-year, but in line with analyst expectations and representing 52% of the full-year forecast. The results reflect softer retail gas sales, lower residential connections, and reduced contributions from high-margin businesses. Despite these pressures, the company increased its interim dividend per share by 20% to HK\$0.30, signaling confidence in shareholder returns.

Financial Highlights and Ratios

Margin and Segment Analysis

• Gross Margin: Narrowed to 17.1% (-1.4ppt YoY), driven by weaker volumes and reduced high-margin segment contributions.
• Procurement Cost: Average gas procurement cost declined by Rmb0.06/m³ YoY, lifting unit margin to Rmb0.55/m³ (+Rmb0.01).
• Core Gas Sales: Now accounts for 73.7% of group gross profit (+2.5ppt YoY), offsetting contraction in new connections and comprehensive services.
• Guidance: Management targets further margin improvement in 2025, supported by broader cost pass-through (80% for residential, 100% for commercial/industrial).

Retail Gas Sales Volume Trends

• National Gas Consumption: 211,970m³ (-0.9% YoY) in 1H25.
• CR Gas Retail Sales: 20,760m³ (-0.7% YoY), outperforming the broader industry.
• Segment Breakdown:
  • Residential: 6,000m³ (+4.2% YoY)
  • Industrial: 9,450m³ (-2.2% YoY)
  • Commercial: 4,880m³ (-2.6% YoY)
  • Vehicle: 0.43m³ (-8.5% YoY)
• Outlook: Management guides for low single-digit YoY growth in 2025, with recovery expected in industrial volumes and continued strength in residential demand.

Connection and User Growth: Urban Renewal as a Strategic Pivot

• New Residential Connections: Fell to 831,000 (-18.7% YoY) due to property sector weakness.
• Mix Shift: 80.3% new-build, 19.7% old-property renovation.
• Total Connected Customers: Rose to 61.37 million (+4.3% YoY).
• Backlog: 959,000 newly signed residential contracts and 1,460 new commercial & industrial users (potential volume: ~530m cbm).
• Guidance: Full-year target of 2.1m–2.2m new households, with catch-up expected in 2H25 via old-housing conversions and urban renewal programs.
• Shanghai Project Exit: Flagged as an additional drag, but the company is building a strong backlog.

Comprehensive Services: Digital Transformation Amidst Softness

• Revenue: Fell to HK\$1,446 million (-18.1% YoY), raising concern over management’s “low to mid single digit growth” target.
• Outlook: Management remains confident in full-year targets, citing digital initiatives such as Gas Butler, livestreaming, and short-video marketing to stabilize volumes in 2H25.

Balance Sheet and Cash Flow Highlights

Key Metrics and Ratios

• EBITDA Margin: Expected to rise from 10.8% (2024) to 12.3% (2027)
• Net Margin: 4.0% (2024), projected to reach 4.5% (2027)
• ROE: Expected stable at 10.6% in 2026/2027
• Debt to Equity: Improving from 61.3% (2024) to 49.9% (2027)
• Dividend Payments: Steady increases, with a forecast of Rmb2,501.2 million in 2027

Valuation and Recommendation

• Valuation Method: DCF-based, with WACC at 9% and terminal growth at 3%
• Upgrade to BUY: Target price HK\$22.60 reflects resilient performance and sector-leading fundamentals
• Defensive Play: CR Gas is positioned as a defensive stock with re-rating potential in a muted sector environment
• Catalysts:
  • Stronger-than-expected recovery of gas consumption
  • Continued margin discipline and procurement efficiency
  • Execution on urban renewal and digital initiatives

Risks and Earnings Revisions

• Earnings Estimates: 2025/26/27 earnings fine-tuned by -2%/-7%/-8% respectively due to interim softness
• Risks: Prolonged property sector weakness, slower digital transformation, or further industry-wide contraction could impact future results
• Mitigants: Stable guidance across volume, margin, and connections, plus sector-leading procurement and pass-through coverage

Conclusion: Resilient Fundamentals and Strategic Adaptation

China Resources Gas has delivered a resilient interim performance in a difficult operating environment. Outperforming the industry in gas sales, maintaining stable margins, and adapting to sectoral weakness by pivoting toward urban renewal, the company is well-positioned for a potential upturn. With much of the sector softness already priced in and management maintaining guidance, CR Gas offers meaningful upside for investors seeking stability and growth in China’s utilities sector.

About the Analysts

• Ziv Ang Sze Champ
• Claire Wang

Disclaimers and Regulatory Information

UOB Kay Hian prepared this report for general circulation. This is not an offer or solicitation to deal in securities. Please consult a financial adviser regarding the suitability of any investment. UOB Kay Hian and its affiliates may have business relationships with companies mentioned herein. For country-specific regulatory information, please refer to the full disclosures.