J.P. Morgan remains cautious on China gas utilities: soft volumes, limited margin flexibility, weak new connections

Overview

This report is J.P. Morgan's China gas utilities meeting note following meetings with Kunlun and CR Gas during the Global China Summit. The report focuses on tracking 4M26 operating metrics, including retail gas sales volume, industrial and residential/commercial demand, RMB margin, new connections, LNG terminal utilization, LNG plants, LPG, as well as CR Gas's integrated services and integrated energy businesses. The overall conclusion is that the sector lacks clear core growth drivers, with limited volume growth and margin upside, while new connections and some non-gas businesses remain under pressure.

Core views

The core view is cautious. First, retail gas sales volumes in 4M26 were mostly flat or down year on year, with residential and commercial demand affected by a warm winter, the macro environment, and weak consumption. Second, industrial gas demand improved in April, supported by steel demand, strength in certain industries, and the return of export orders driven by Southeast Asian energy disruptions, but the magnitude of improvement was still insufficient to change the sector's overall muted trend. Third, RMB margins have been broadly stable year to date, but winter gas sourcing costs and high LNG prices may weaken subsequent margin performance. Fourth, new connections remain sluggish, with property-related demand and household connections contributing little to gas company growth. Fifth, Kunlun's LNG terminals and LNG plants showed diverging performance, while CR Gas's integrated services and integrated energy posted high single-digit growth but still lagged full-year double-digit growth guidance.

Analysis framework

The report uses a meeting-note and operating-metrics tracking approach, comparing management discussion points with actual 4M26 operating data and FY26E full-year guidance to assess whether sales volume, margins, new connections, and non-gas businesses have enough momentum to achieve full-year targets.

Methodology notes

• Meeting researchGlobal China Summit management meetings

  Obtain operating trends through company meetings

  The report is based on meetings with Kunlun and CR Gas, extracting 4M26 operating trends, management guidance, and key risk points.

• Industry operating analysisVolume-price-profit and business-segment breakdown

  Assess the outlook for gas utilities using sales volume, RMB margin, new connections, and non-gas business growth

  The report separately examines retail gas, industrial gas, residential and commercial gas, new connections, LNG terminals, LNG plants, LPG, and integrated services businesses to judge the pressure on delivering full-year guidance.

Asset mapping & comparison

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

• Kunlun Energy (0135.HK)

  Company covered in the meetings; core sample in China gas utilities

  Strengths

  LNG plant processing volume grew by more than 30% year on year in 4M26, LPG profit improved due to wider margins, and E&P production is tracking full-year guidance with support from relatively high oil prices.

  Weaknesses

  Retail gas sales volume was basically flat year on year in 4M26, new connections were close to 200,000 households versus full-year guidance of 600,000 to 700,000 households, and LNG terminal sales volume declined by a low double-digit percentage.

  Comparison

  Compared with CR Gas, Kunlun has highlights in LNG plants and upstream-related businesses, but its LNG terminals are more sensitive to high international LNG prices.

  Risks

  International LNG prices remain high, spot procurement declines, a warm winter and weak macro demand, and sluggish new connections.

• China Resources Gas (1193.HK)

  Company covered in the meetings; core sample in China gas utilities

  Strengths

  Industrial gas demand improved in April, lifting 4M industrial gas year-on-year growth to about 2.4%; retail gas RMB margin was Rmb0.48/m³ in 4M, up 1-2 fen year on year; integrated services and integrated energy sales achieved high single-digit growth.

  Weaknesses

  4M retail gas sales volume fell 0.5% year on year, commercial gas fell about 6% year on year, new connections fell about 20% year on year, and integrated services and integrated energy still lagged full-year double-digit growth guidance.

  Comparison

  Compared with Kunlun, CR Gas has greater exposure to integrated services and integrated energy growth, but it likewise faces pressure in delivering full-year guidance.

  Risks

  Higher annual gas sourcing costs under new contracts, elevated LNG prices, weak commercial consumption, and a higher base for integrated services in 2H26E.

• China natural gas utilities sector

  Industry covered by the report

  Strengths

  Some industrial demand improved in April, and export-related demand and returning orders supported industrial gas.

  Weaknesses

  Retail gas sales volume growth is limited, residential and commercial demand is weak, new connections remain sluggish, and margin upside is limited.

  Comparison

  Overall industry operating trends are weaker than the pace required by full-year growth guidance, with improvements mainly concentrated in a few industrial and non-gas business subsegments.

  Risks

  Warm winter, weak macro consumption, sluggish demand for property-related building materials, winter gas sourcing costs, and high LNG prices.

Key data

• Kunlun retail gas sales volumeBasically flat year on year in 4M26Below the pace implied by FY26E full-year growth guidance of about +3%, mainly affected by a warm winter and macro headwinds.
• CR Gas retail gas sales volumeDown 0.5% year on year in 4M26Below FY26E guidance for low- to mid-single-digit growth; commercial gas was down about 6% year on year in 4M.
• CR Gas industrial gas sales volumeAbout +2.4% year on year in 4M26Improved from about +0.6% in 1Q, supported by export-related demand and the return of orders.
• CR Gas retail gas RMB marginRmb0.48/m³Up 1-2 fen year on year in 4M, but the magnitude of improvement narrowed in April, and higher annual gas sourcing costs under new contracts may still continue to flow through.
• Kunlun new connectionsNearly 200,000 new households added in 4MFY26E guidance is 600,000 to 700,000 households, and current progress still appears weak.
• CR Gas new connectionsDown about 20% year on yearFY26E guidance implies a full-year year-on-year decline of about 20%-30%.
• Kunlun LNG terminal sales volumeLow double-digit year-on-year decline in 4M26Mainly because high international LNG prices reduced PetroChina's spot procurement.
• Kunlun LNG plant processing volumeUp more than 30% year on year in 4M26Driven by demand for LNG heavy trucks and improved plant utilization.
• CR Gas integrated services and integrated energy salesBoth achieved high single-digit year-on-year growth in 4M26Still below FY26E double-digit growth guidance, especially as integrated services may face pressure after the base rises in 2H26E.

Impact & implications

The investment implication is that China gas utilities lack strong near-term catalysts. Improving industrial gas demand and growth in some non-gas businesses provide some support, but weak residential and commercial demand, sluggish new connections, and gas sourcing cost pressure limit earnings flexibility. If LNG prices remain elevated or winter costs cannot be effectively passed through, the scope for sector margin and valuation recovery may be constrained.

Risks

• Persistently high international LNG prices may suppress LNG terminal utilization and increase gas sourcing cost pressure.
• If winter gas sourcing costs are higher than expected and cannot be fully passed through, retail gas RMB margins may be compressed.
• A warm winter and weak consumption may continue to drag on residential and commercial gas demand.
• Weak demand in the property chain and building materials may limit the strength of industrial gas recovery.
• Continued declines in new connections will weaken the traditional growth source for gas companies.
• If CR Gas integrated services and integrated energy cannot improve from high single-digit to double-digit growth, FY26E guidance may come under pressure.

What to watch

• Whether the April improvement in industrial gas can continue in subsequent months.
• Winter gas procurement costs and the extent to which they can be passed through to end-user prices.
• The impact of international LNG prices on utilization at Kunlun LNG terminals.
• Whether Kunlun's progress in new connections can catch up with its full-year guidance of 600,000 to 700,000 households.
• Whether CR Gas integrated services and integrated energy can achieve the FY26E double-digit growth target.
• Whether residential and commercial gas demand improves along with consumption and weather factors.
• The sustainability of returning export-related orders in supporting industrial gas demand.