Towngas China Surges Most in a Decade as Citi Predicts Takeover

(Bloomberg) -- Hong Kong-listed gas supplier Towngas China Co. surged on Monday after Citigroup Inc. identified the company as a potential takeover target.

China Resources Gas Group Ltd. may make an offer to acquire Towngas, lured by the stock’s cheap valuation, according to Citi. Towngas jumped 11% at the close, its biggest gain since October 2009. China Resources Gas rose 4.8%.

Natural gas distributors are among the biggest winners in President Xi Jinping’s battle against air pollution, which has driven a pivot away from coal. Revenues have been boosted by an overall jump in sales volumes, as well as fees for connecting new customers. Consumption rose nearly 11% in the first seven months, on course to extend for a third year the double-digit demand boom that’s made China the top importer of the fuel.

Towngas is “vulnerable to a takeover due to its deep valuation discounts to the bigger peers,” Citi analysts wrote in a note dated Sunday, upgrading the stock to buy from neutral. The shares trade at 0.9 times of this year’s estimated book value, compared with a sector average of 2.1 times, they said. The company, headquartered in Hong Kong, has been focused on providing city-gas to mainland Chinese cities, according to its website.

China Resources Gas may offer to buy Towngas at HK$7.57 to HK$8.73 per share, representing a 39% to 60% premium from Friday’s close, according to Citi. China Resources Gas -- owned by one of the nation’s largest state-owned conglomerates -- is expected to fund the deal by issuing new shares to Towngas shareholders, it said.

An official at China Resources Gas’s investor relations department declined to comment as the company did not have information on the Citi note. Towngas did not respond to calls and an email seeking a response.

--With assistance from Feifei Shen, Ramsey Al-Rikabi and Livia Yap.

To contact the reporter on this story: Jeanny Yu in Hong Kong at jyu107@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Magdalene Fung, Jasmine Ng

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