Kunlun Energy’s earnings grew 5% YoY to RMB3.3bn in 1H26, 5% ahead of our forecast. The discrepancy mainly came from the better-than-expected profit at LPG sales and LNG processing operations. We expect its earnings to drop 19% HoH in 2H26 as the company usually books higher costs in the 2H of a year. We reiterate our BUY call with target price lowered to HK$8.59.
Key Factors for Rating
In 1H26, Kunlun’s small E&P business posted 4.4x jump to RMB331m in pre-tax profit as its realised oil price increased 14% YoY. The pre-tax profit of its LNG process plants almost doubled YoY to RMB269m as processing volume surged 30% YoY and all the plants have changed to processing for third party mode and no longer had to bear the risk of fluctuation in gas price. The pre-tax profit of LPG sales also grew 22% YoY to RMB657m on increase in higher-margin retail volume. The latter two were the drivers for the better-than-expected earnings for the period.
However, its other operations suffered from weak natural gas demand. The pre-tax profit of its natural gas sales segment dropped 6% YoY to RMB4.2bn as retail gas sales volume slipped 1% YoY and dollar margin contracted RMB0.01/m3 YoY to RMB0.43/m3. The pre-tax profit of its two LNG terminal also dropped 12% YoY to RMB1.5bn as throughput dipped 9% YoY.
We expect the company’s earnings to drop 19% HoH in 2H26 mainly because it usually books more cost in the 2H of a year. We also assume the average oil price to be 4% HoH lower based on our current full-year forecast.
The company is keen on rewarding its shareholders. It raised the dividend payout ratio from 45% in 1H25 to 50% in 1H26. While we keep our 2026 full-year payout ratio at 50%, we do not rule out further increase in payout ratio as the company had RMB48bn cash and deposit on hand by end of June 2026. It has also bought back 39m shares for HK$273m so far this year.
Key Risks for Rating
Further decline in dollar margin.
Higher-than-expected cost.
Valuation
We lower our DCF-based target price from HK$8.87 to HK$8.59 to mainly reflect the lack of gas sales volume growth and lower-than-expected dollar margin for the natural gas sales segment over the longer term. Our new target price is equal to 10.6x 2026E P/E.