HSBC Research lowers KUNLUN ENERGY's target price to 9.8 yuan, expects profit growth to slow but profit quality to improve

HSBC Global Research published a report stating that although KUNLUN ENERGY (00135.HK) saw a 10% increase in natural gas sales in the first half of the year, the pre-tax profit of the natural gas segment decreased by 11% year-on-year. KUNLUN's management indicated that the profit decline was caused by two factors, including weak profitability in natural gas distribution and trading; the government-subsidized pipeline upgrade projects are nearing completion.

HSBC has lowered its earnings per share forecast for KUNLUN ENERGY for 2025 to 2027 by 1% to reflect the weak natural gas sales in the first half of 2025. HSBC expects the company's future profit growth to slow down, but reliance on government subsidies will decrease, indicating an improvement in profit quality; it has adjusted the target price from HKD 10.1 to HKD 9.8, maintaining a "Buy" rating.

HSBC has raised its annual retail gas sales growth forecast for KUNLUN ENERGY for 2025 to 2027 to 4%, 6%, and 6% respectively (previously 3%, 4%, and 4%). The assumption for 2025 is more conservative than the company's guidance (5%) due to uncertainties in industrial demand; it has lowered the unit profit margin assumptions for 2025 to 2027 to RMB 0.46 per cubic meter (previously RMB 0.5, 0.51, and 0.51).

HSBC has also lowered the company's net income assumptions for 2025 to 2027, as it expects government subsidies to decrease with the completion of the pipeline network upgrade projects in 2025. Based on the performance in the first half of 2025, HSBC assumes a higher EBITDA unit profit margin for the LNG plant; and based on the revised guidance, it has lowered the growth forecast for LNG plant processing volume to an increase of 2% (previously an increase of 7%)