Narrow-moat Beijing Enterprises Holdings, or BEH, posted decent first-half 2016 results, with recurring profit increasing 16% year over year to CNY 3.6 billion, making up 52% of our full-year forecast. The midstream gas Transmission volume was a little softer than we anticipated; however, downstream gas distribution volume remains robust, rising 21% from a year ago. While we see risks of potential midstream transmission tariff cuts, China’s air pollution issues will bolster the government policy focus on promoting wider use of natural gas instead of coal, which should sustain a healthy long-term growth. We maintain both our 2016 earnings forecast of CNY 6.5 billion and our fair value estimate of HKD 58.00 per share, with a worstcase scenario of a cut in returns for the Shaanxi-Beijing transmission pipelines to 8% from 12% in 2017 being fully reflected in our valuation model.

We think BEH is undervalued at the current price level, trading at 8 times 2016 price/earnings and 0.9 times price/book, with a stable growth outlook underpinned by its defensive gas transmission and distribution assets, versus 15-18 times price/earnings and almost 3 times price/book for its industry peers.

Analyst: Jennifer Song

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