Commercial and Industrial (C&I) users have been resuming operation from 10 Feb. Migration inflow of major cities had read significant YoY decline, however, according to our macro team’s observation. We established a scenario analysis framework to estimate NCP’s impact to China gas distributors from 1) exposures in Hubei, 2) C&I gas sales outside Hubei, 3) compensation from additional residential gas usage, and 4) potential delay for residential gas connection. We believe gas distributors’ impact from Hubei exposures is mild (0.5-1.2%), while C&I gas volume decline due to operation disruption will be more significant (base case: 3.9-4.8%). Overall, we expect net profit impact would be limited at (FY20E 1.5-7.1%). Sector earnings performance would be resilient, and we prefer CGH (384 HK, BUY, TP: HK$38.0) for less C&I exposures with relatively less impact.
- Gas sales impact from Hubei will be mild. CGH/CRG (1193 HK, NR) have 36/16 city gas projects with ~6%/7% of annual retail gas sales in Hubei respectively, while ENN (2688 HK, NR) has no exposures. Our scenario analysis indicates CGH/CRG may suffer only 1.0-1.2% gas volume impact at most from Hubei, which will have very limited impact on bottom line.
- C&I gas volume impact likely higher outside Hubei. As we expect it will take time for C&I users operation to resume normal, we think C&I volume impact outside Hubei worth more attention. We assume C&I gas users will take 4/7/16 weeks (from 10 Feb) to resume normal in different scenarios, we estimate gas distributors to suffer 4.5-13.7% C&I gas volume decline, translating to ~3-10% total gas volume decline. ENN may suffer relatively higher impact than CGH and CRG due to higher C&I gas sales mix.
- Residential gas sales may have slight compensation. We expect city residents to consume more gas at home since dining outside is highly discouraged. We assume average residential gas usage to increase 6%/3%/1% in different scenarios, which will bring about 1.7-0.2% total gas volume growth to partial compensate C&I volume loss.
- Stimulus policies to bring additional impact. Zhejiang and Hubei government had released stimulus policies, cutting gas price by 10% for 3/6 months respectively to support economy and SMEs. We expect those measures to be extended to more provinces, but we see upstream oil majors to share the costs (i.e. cutting city-gate price accordingly). We estimate a wider scope price cut will have additional 1-2.5% impact on gas distributors’ net profit.
- Limited impact for residential connection at current stage. We have not yet factored in impact for residential connection at current stage. 1Q is usually low season and connection pace can be ramped in the following quarters. However, if residential connection cannot resume in 2Q20, we expect gas distributor to suffer 5-10% cut on annual connection target, translating to potential 1-4% earnings decline depending on connection revenue mix.
- Overall: gas distributors are still resilient. We expect gas distributors’ earning to be subject to 1.5-3.4% impact (base case) from COVID-19 caused disruption. In the worst case, we estimate earnings downside of only 3.1-7.1%, with largest impact on ENN. We prefer CGH for less C&I exposures and less earnings impact.
