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　　Beijing Enterprises Holdings （BEHL） is a Chinese leading utilities company with a high-quality asset portfolio, and its main businesses include city gas provision, water supply and solid waste treatment. Backed by resource support from its state-owned shareholder, the firm has maintained steady asset expansion in the past 10 years, with attributable net profit growing at a CAGR of over 10%. We expect BEHL to maintain double-digit earnings CAGR over the 14th Five-year Plan （FYP） period despite the negative impact from the COVID-19 pandemic in 2020.
　　Moreover, we think the firm’s dividend payout ratio bottomed in 2018, and rising expectations of improved corporate governance and dividend increase may drive a major re-rating.
　　Reasoning Causes for sharp valuation declines during 13th FYP period. In the
　　past few years, BEHL recorded continued valuation declines while maintaining stable growth in assets and earnings. We attribute this to: 1） market concerns that BEHL’s 40% stake in Beijing Gas Pipeline Company may also be disposed after Kunlun Energy transferred its controlling stake to PipeChina; 2） reduced investment income from Beijing Gas Pipeline caused by cuts in transmission fee; and 3） a tumble in dividend payout ratio （down from a historical high of 30% to 17%）。
　　Risks related to stake in Beijing Gas Pipeline largely removed. After
　　Kunlun Energy announced the sale of a 60% stake in Beijing Gas Pipeline to PipeChina at end-2020, PipeChina consolidated Beijing Gas Pipeline into its financials. We think BEHL will likely maintain the remaining 40% stake, and the risk of potential disposal has been largely removed. Beijing Gas Pipeline Company’s earnings downward trend is nearly over, and the connection of more Russian natural gas should drive a continued increase in pipeline transmission volume and a recovery in pipeline business earnings. Moreover, we believe BEHL’s dividend payout ratio already bottomed out in 2018, and we expect it to gradually recover to or exceed the historical high of 30%.
　　Expectation of rising dividend ratio to drive a re-rating. We believe BEHL’s fundamentals may continue to improve. Given the firm’s diversified business portfolio and stable growth of its utilities business, we do not rule out the possibility that some investors may switch to DDM valuation. Moreover, the expectation that dividend payout ratio might increase from 17% to 30% in the medium to long term should give an important boost to re-rating, offering significant potential upside.
　　Earnings forecast and valuation
　　We maintain our 2021 earnings forecast largely unchanged, but trim our 2022 earnings forecast by 13% to HK$8.5bn mainly reflecting lowered FY22 earnings forecast for associate firm China Gas due to disappointing performance of the connection business. We think China Gas may see recovery in earnings growth after the adjustment ends in FY22, and the medium-to-long-term growth remains intact. We maintain OUTPERFORM and TP of HK$39.0, implying 6x 2021e P/E, offering 48% upside. The stock is trading at 4x 2021e P/E.
　　Risks
　　Beijing Gas business growth and dividend to parent company disappoint; earnings decline at China Gas extends longer than expected.