CHINA GAS HOLDINGS(384.HK)：DOWNGRADE AFTER ANOTHER MISS IN EARNINGS

Core Viewpoint - The earnings of China Gas for FY25 increased by only 2% to HK$3,252 million, which is 21% below the forecast, leading to a downgrade to HOLD due to limited upside potential [1] Earnings Performance - Earnings from gas connection and engineering segments were significantly lower than expected, with a 15% YoY decline in new connections and a drop in EBIT margin by 3.2 percentage points to 20.3% in FY25 [1] - Natural gas sales earnings also fell short, with retail gas sales showing no growth due to a decline in residential gas consumption amid a warm winter [1] - Other income decreased by HK$260 million YoY due to the disposal of LPG vessels, and contributions from associates and joint ventures were HK$426 million below forecast [1] Future Outlook - The company anticipates a 13% YoY growth in earnings for FY26, driven by a projected 2%+ YoY growth in retail gas sales volume and an improvement in dollar margin from RMB0.537/m³ in FY25 to RMB0.55/m³ in FY26 [2] - A 10%+ YoY increase in profit from value-added services is expected, with new kitchen renovation services launched [2] - However, new connections are projected to decline from 1.4 million households in FY25 to 1.0-1.2 million households in FY26 [2] Cash Flow and Valuation - Free cash flow improved from HK$4.29 billion in FY24 to HK$4.66 billion in FY25, primarily due to a HK$2.8 billion reduction in loans to joint ventures, although this trend may not be sustainable [3] - The value-added services segment is the fastest-growing business but will be separately listed, reducing its proportional contributions to the company [3] - The target price has been slightly raised from HK$7.58 to HK$7.77, reflecting a lower WACC from 6.8% to 6.5% due to a lower risk-free rate and cost of debt [4]