HKCG reported in line 1H17 results with core profit +2.4% yoy to HKD3.8bnmainly driven by a 86% core profit growth of new energy segment due to higheroil prices, but dragged by flattish core profit growth in Mainland Utilities and HKCore segments. We maintain Sell on HKCG due to its expensive valuations asit is trading at 26x 2018 P/E （vs. peer avg. of 12x） compared to a mere 9% netprofit CAGR over 2017-19E. We prefer Towngas （Buy, HKD6.4） over HKCG （Sell）due to stronger leverage on recovering China business and much less demandingvaluations （10x 2018 P/E）。
　　1H17 core earnings up 2.4% yoy, in line
　　HKCG's reported net profit was up by 3.3% to HKD4.47bn. Excluding propertyevaluation gain/FX loss/securities disposal gains, total operating profit after tax（OPAT） was up 2.4% yoy to HKD3.8bn, in line with our expectations. MainlandUtilities segment OPAT was flattish at HKD1.97bn. The 13% yoy retail volumegrowth （15% yoy for C&I, 6% yoy for residential） and 3% yoy new connectiongrowth were offset by a Rmb4cents/cm yoy margin decline （to Rmb0.73/cm in1H17）， a 5% yoy RMB depreciation and higher financial cost. Hong Kong Coresegment OPAT was flat yoy at HKD1.65bn with a 0.8% yoy volume growth. NewEnergy segment OPAT surged by 86% yoy thanks to higher oil prices （+30% yoy）。
　　Mgmt expects 13% mainland gas volume growth and stable margin outlookMgmt expects a 13% yoy volume growth in 2017 for mainland gas sales businessmainly driven by robust gas demand from C&I users. Mgmt attributes the 1H17margin decline （4cents/cm yoy） to the incomplete cost pass-through of city-gateprice hike initiated by PetroChina during Nov 2016-Mar 2017. According to themgmt, the impact is temporary and city-gate prices have already adjusted backto benchmark in March. Mgmt does see some threats from LNG direct deliverybut do not expect much impacts, therefore they expects the margin to be flat yoyin 2017 helped by higher contribution from C&I gas sales whose margin is higherthan residential. Mgmt expects to connect 2.0mn new households in 2017 （vs.
　　2.1mn in 2016）。
　　Other key takeaways from analyst briefingMgmt expects HK business to benefit from tariff hike （+4.3%） starting in 2H17.
　　The company will deploy 50-60% of budgeted mainland China capex （HKD10bnover 2017-19E） to New Energy segment. There are 5 new energy （mainly coal/oil/coke-oven-gas chemical and waste-to-energy projects） to be operational over2H17-2018, with a total capex of Rmb2.2bn and estimated earnings of Rmb0.6bn.