China gas utilities' 1H26 results may be weak, and the sector's turning point has yet to arrive

Overview

This report is JPMorgan's 1H26 earnings preview and valuation update for the China gas utilities sector. The core judgment is that 1H26 results may disappoint, with year-over-year profit declines for most companies and downward pressure on consensus earnings forecasts after results are announced. Although the sector has materially underperformed year to date, valuations are not demanding, and the average dividend yield is about 6%, the report believes the turning point has not yet arrived and investors still need to wait for clearer visibility on winter gas prices and gas gross margins.

Core views

The report's core views include three points. First, weak gas volumes, fewer new connections, and lower gas gross margins will weigh on 1H26 results, and most gas utility companies may miss expectations. Second, the operating environment in 2H26 is still expected to be challenging, with gas volume growth for covered companies in 2026E below 1% and weak momentum in new connections and the macro environment. Third, tight global LNG supply-demand conditions in winter and low European inventories may push up winter gas prices, thereby compressing winter gas gross margins, making a broad sector rerating difficult in the near term.

Analysis framework

The report assesses sector risk-reward by combining company 1H26E earnings forecasts, FY26-28E earnings revisions, target price changes, valuation multiples, dividend yields, free cash flow, and global natural gas price forecasts. For individual stocks it uses methods including P/E, P/B, dividend yield, and SOTP, with a focus on comparing which companies are better able to withstand gas price volatility.

Methodology notes

• Earnings forecast1H26E earnings preview

  Bottom-up company earnings forecasts

  The report forecasts 1H26 core earnings or operating profit changes company by company, using gas volumes, gas gross margin, new connections, LNG trading, and receiving terminal utilization as the main drivers.

• Valuation methodsP/E valuation method

  Target prices based on FY27-28E earnings

  Target prices for CR Gas, ENN Energy, and Kunlun Energy are mainly based on FY27-28E P/E multiples, adjusted for historical averages, earnings growth quality, and execution risk.

• Valuation methodsSOTP valuation method

  Sum-of-the-parts valuation

  ENN Natural Gas-A uses the SOTP method, with its city gas business anchored to ENN Energy's target price and other businesses valued based on peer P/E or P/B multiples.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Resources Gas (1193.HK)

  Covered company, city gas distributor, rated Neutral, target price HK$16.50.

  Strengths

  Has 275 city gas projects and more than 60 million residential customers; the FY27E target price implies about a 5.8% dividend yield.

  Weaknesses

  Gas volume growth is weak, new connections are declining, and integrated services revenue growth is modest; FY26-28E earnings forecasts were cut by an average of about 8%.

  Comparison

  Compared with ENN Energy and Kunlun, the report is more conservative on its rating and sees less target price upside.

  Risks

  Property sales, LNG prices, gas volume recovery, and expense levels could all affect the rating and target price.

• ENN Energy (2688.HK)

  Covered company, city gas distributor, rated Overweight, target price HK$57.00, and the report's top pick.

  Strengths

  FY26E dividend yield exceeds 7%, and the HK$3 per share dividend is well supported; LNG contracts help generate trading profits in a high gas price environment; the company may cut growth capex, improve free cash flow, and consider buybacks or higher dividends.

  Weaknesses

  1H26E core earnings are expected to decline about 7% year over year; retail gas volumes are nearly flat, gas gross margin is slightly lower, and growth in integrated energy and value-added services is weak; privatization execution issues led to a lower valuation multiple.

  Comparison

  Within the sector, it combines a high dividend yield with LNG contract support and is JPMorgan's top pick.

  Risks

  Gas sales, new connections, integrated energy, value-added services growth, or gross margin may come in below expectations.

• ENN Natural Gas-A (600803.SS)

  Covered company, one of the largest listed A-share city gas distributors, rated Overweight, target price Rmb21.00.

  Strengths

  Consolidates ENN Energy's financials and owns upstream LNG resources; overseas LNG sales and direct gas sales may benefit in a high global gas price environment.

  Weaknesses

  1H26E core operating profit is expected to decline about 9% year over year; contributions from the city gas business and LNG receiving terminals are weak; 2027-28E gross margin assumptions for overseas direct gas sales were lowered.

  Comparison

  Compared with pure city gas companies, it has stronger upstream LNG exposure, but its valuation depends on a multi-business SOTP and ENN Energy's target price.

  Risks

  Gas volumes and average selling prices, USD gas sales margins, LNG receiving terminal utilization, and engineering business performance may all come in below expectations.

• Kunlun Energy (0135.HK)

  Covered company, CNPC's downstream natural gas platform, rated Overweight, target price HK$7.60.

  Strengths

  Has a strong net cash position, and higher dividends appear sustainable; operations cover natural gas distribution, LNG processing, and receiving terminal operations.

  Weaknesses

  1H26E earnings are expected to decline about 6% year over year; gas gross margin and volume growth assumptions were lowered, and LNG receiving terminal utilization is under pressure; FY26-28E earnings forecasts were cut by 6-7%.

  Comparison

  Compared with CR Gas, the rating is more positive, but the report reduced the valuation multiple from about 11x to about 10x due to weakening earnings prospects.

  Risks

  Downside risks remain for downstream gas volumes, cost pass-through, LNG plant performance, receiving terminal utilization, and terminal tariffs.

Key data

• Sector 1H26E profit changeAverage about -4% year over yearJPMorgan expects most gas utility companies to report 1H26 results below expectations.
• JPMorgan FY26-27E forecasts vs. consensusAbout 7% belowThe report expects post-results consensus earnings forecasts to be revised down.
• 2026E gas volume growth for covered companiesBelow 1%Weak volume growth is a key reason why the sector turning point has not yet appeared.
• Winter natural gas price assumption4Q26 winter gas prices may be close to doubling year over yearJPMorgan's global energy analysts believe tight global LNG supply-demand conditions and low European inventories will push up winter gas prices.
• NWE+UK gas storage inventory41% as of July 12, 2026Below 56% in the same period last year and the 2022-25 average of 70%.
• ENN Energy 1H26E core earningsAbout Rmb3.0bn, about -7% year over yearRetail gas volumes were nearly flat, gas gross margin declined slightly, and new connections, integrated energy, and value-added services were weak.
• CR Gas 1H26E earningsAbout HK$2.4bn, about -1% year over yearDeclining new connections and limited expansion in volumes and margins may be partly offset by RMB appreciation.
• Kunlun 1H26E earningsAbout Rmb3.0bn, about -6% year over yearRetail gas volumes were nearly flat, margins declined slightly, and LNG receiving terminal utilization fell year over year.
• ENN Natural Gas-A 1H26E core operating profitAbout Rmb2.5bn, about -9% year over yearCity gas and LNG receiving terminals were a drag, but direct gas sales contributed more.
• HKCG 1H26E core earningsAbout HK$3.3bn, about +6% year over yearThe biofuel associate was supported by high oil prices, offsetting weakness in mainland city gas.

Impact & implications

For portfolios, the report does not support a broad overweight in the China gas utilities sector and instead prefers selectively choosing companies with high dividend yields, improving free cash flow, and upstream LNG resource exposure amid post-results forecast cuts and share price pullbacks. The key near-term issue is not cheap valuation, but whether winter gas prices, gas gross margins, and volume growth can stabilize.

Risks

• Tight global LNG supply-demand conditions in winter and low European inventories may push up gas prices and compress winter margins for gas utility companies.
• Gas volume growth may be weaker than expected, especially if industrial and commercial demand recovery is insufficient.
• New connections continue to decline, reflecting weak property-related demand and momentum for new city gas users.
• Consensus earnings forecasts may be revised down after results, which could continue to pressure short-term share price performance.
• Company-level expenses, capex, LNG receiving terminal utilization, and growth in integrated energy and value-added services may all disappoint expectations.

What to watch

• After 1H26 results are announced, the gap between actual earnings and JPMorgan's and market consensus expectations.
• The magnitude of post-results cuts to FY26-27E market consensus earnings forecasts.
• The trend in global natural gas and LNG prices in 4Q26 winter, as well as the pace of European storage refilling.
• Whether gas gross margins can remain stable as winter demand rises.
• Whether ENN Energy cuts growth capex, improves free cash flow, implements buybacks, or raises dividends.
• Recovery in city gas volume growth, new connection volumes, and integrated energy/value-added services revenue.