CITIC SEC has released a research report indicating that the intensity and duration of geopolitical conflicts will determine the extent of supply constraints for Middle East LNG. By 2026, the firm expects domestic natural gas import costs to rise by 7% to 25%. Given that residential gas pricing mechanisms have largely been implemented and natural gas prices were relatively high before the U.S.-Iran conflict, CITIC SEC projects that leading urban gas distributors will see their gross margins narrow to around 0.03–0.04 yuan per cubic meter in 2026. This would result in a 2% to 11% year-on-year decline in earnings, which remains relatively moderate. After accounting for the impact of rising gas prices, leading urban gas distributors are expected to trade near their historical average P/E ratios in 2026 while maintaining attractive dividend yields. Despite the gas price shock, their investment appeal remains notable.

Key viewpoints from CITIC SEC are as follows:

Geopolitical tensions may increase domestic natural gas import costs by 7% to 25%. Domestic natural gas consumption relies on imported LNG for more than 20% of its supply. In 2024, LNG imports from the Middle East amounted to approximately 20 million tons, accounting for about 27% of China's total LNG imports. Continued blockades in key shipping routes could substantially disrupt the stability of domestic LNG imports. Since most long-term import contracts are linked to international oil prices, a structural increase in oil prices from the previous range of 60–65 USD per barrel to 70–80 USD per barrel could raise China's comprehensive natural gas import costs by about 0.15–0.60 yuan per cubic meter. This translates to an estimated 7% to 25% increase in import costs by 2026.

Gas distribution margins are expected to narrow, but the decline is projected to be moderate. Urban gas distributors typically experience weaker gross margins in high-price environments. In 2022, elevated gas prices led to a contraction in gross margins for leading national urban gas distributors to a range of 0.40–0.45 yuan per cubic meter, with an absolute decline of about 0.15 yuan per cubic meter. Due to rising gas prices, CITIC SEC anticipates that leading distributors' comprehensive gross margins will narrow to around 0.50 yuan per cubic meter in 2026. However, margin performance is expected to be significantly better than during the previous price hike cycle. The key factors contributing to this relatively moderate decline are the near-full implementation of residential gas pricing mechanisms and the higher pre-conflict gas price baseline.

Investment recommendation: In 2026, leading urban gas distributors are expected to face earnings pressure from rising gas prices, but the decline in profits is projected to be mild. After factoring in the gas price impact, their P/E ratios are likely to remain close to historical averages, while dividend yields remain attractive. National leading urban gas companies continue to offer strong defensive value. Midstream pipeline operators and terminals that have secured low-cost gas supplies are expected to benefit from rising upstream gas prices. Regional distributors with such businesses may see gains that partially offset the impact on their downstream operations.

Risk factors include lower-than-expected natural gas demand, a sharp increase in natural gas prices, slower-than-expected implementation of pricing mechanisms, slower-than-expected development of LNG trading businesses, and a significant decline in connection services.