CICC published a research report stating that due to uncertainties in the profitability of Kunlun Energy's (00135) distribution and trading segment, the firm has lowered its 2025/2026 net profit forecasts by 9.9%/10.1% to RMB 6.019 billion/RMB 6.205 billion respectively. The current stock price corresponds to 10.1x/9.6x P/E for 2025/2026. CICC maintains its outperform rating and, taking into consideration earnings forecast adjustments and the company's medium to long-term dividend potential, has lowered the target price by 5.9% to HK$8.00, corresponding to 10.5x/10.1x P/E for 2025/2026, representing 4.6% upside from the current stock price.

CICC's main viewpoints are as follows:

**1H25 Results Below Expectations**

The company announced 1H25 results: revenue of RMB 97.54 billion, up 5% YoY; attributable net profit of RMB 3.16 billion, down 4% YoY, below expectations. This was primarily due to the completion of some aging pipeline renovations in 2024, resulting in reduced subsidies and causing 1H25 other net gains to decrease 49% YoY to RMB 380 million.

In 1H25, the company's natural gas sales volume increased 10% YoY to 29.1 billion cubic meters, with distribution and trading gas volume up 22.6% YoY to 12.4 billion cubic meters, and retail natural gas volume up 2.2% YoY to 16.7 billion cubic meters (industrial gas volume +8.0% YoY). Retail gas spread was RMB 0.44/cubic meter, down RMB 0.01/cubic meter YoY. New users added totaled 399,000, down 11.2% YoY. Average utilization rate of receiving terminals was 86.8%, up 1.4ppt YoY; average LNG plant utilization rate was 57.1%, down 1.3ppt YoY; LPG sales volume was 3.07 million tons, up 4.9% YoY.

**Multiple 2025 Guidance Adjustments**

During the earnings conference, the company adjusted several 2025 operational data guidance including retail gas volume growth (+5% YoY vs. previous +8% YoY), LNG plant processing volume (+0-2% YoY vs. previous +7% YoY), and LPG sales volume (5.8 million tons vs. previous 5.6 million tons). CICC believes this overall reflects the current weak downstream gas demand. Additionally, the company maintained guidance for annual new user additions (60-70 million new users for the full year), LNG receiving terminal average utilization rate (85-90% for the full year), and upstream business annual equity sales volume of 8 million barrels.

**Distribution and Trading Business Profitability Still Under Downward Pressure**

Excluding the impact of reduced subsidies, CICC estimates that the company's natural gas sales business profitability still declined, primarily due to weaker LNG spot prices in 1H25 causing downward pressure on the profitability of the natural gas distribution and trading business. Looking ahead, considering that international LNG supply-demand dynamics may become looser starting in 2026, CICC believes that the profitability of some distribution and trading gas volumes with higher sensitivity to LNG spot prices may still face downward pressure.

**Stable Dividends with Medium to Long-term Upside Potential**

In 1H25, despite slightly declining performance, the company maintained modest dividend growth. Looking forward, considering the company's abundant cash on hand and high free cash flow levels, CICC believes the company has the confidence and capability to further enhance cash returns to shareholders, with medium to long-term dividend payout ratios potentially rising to 55-60%.

**Risk Factors:** LNG prices declining more than expected, international oil prices falling more than expected.