China's big state companies, confident on the outlook for domestic natural gas reforms, are buying up local distributors and raising fresh capital - and making gas the hottest prospect for energy investment in the world's top energy consumer.

The prospects for expansion and acquisitions also have China's natural gas distributors trading like growth stocks, instead of bog-standard utilities.

While nuclear power and renewables such as solar and wind are also benefiting from the shift, for now gas looks set to gain the most, since plentiful supplies and its use in industrial production and conventional thermal power plants mean it can be developed quickly and efficiently.

"Natural gas is clean energy that is enjoying a lot of state policy support," said Liu Yang, chief investment officer of regional fund house Atlantis, which manages $4 billion and holds shares of Hong Kong-listed Chinese city gas distributors.

"The city gas sector has been under-invested and is just about to take off," she said.

Shares of Hong Kong-listed distributors, which include ENN (2688.HK), China Gas Holdings (0384.HK), China Resources Gas (1193.HK), Kunlun Energy (0135.HK) and Beijing Enterprises (0392.HK), have risen as much as 37 percent over the past 12 months.

The sector, with a combined market value around $32 billion, boasts valuations of more than 20 times historical earnings, and investors and analysts remain upbeat about its prospects.

State foray

State oil giants such as Sinopec (0386.HK) and PetroChina (0857.HK) are also swooping in on the sector, threatening to squeeze out non-state firms such as China Gas that entered the business more than a decade ago and have since dominated it.

Sinopec and ENN recently made a $2.2 billion cash bid for China Gas and a bidding war may be brewing with state-run conglomerate Beijing Enterprises Group -- parent of Hong Kong-listed distributor Beijing Enterprises Holding.

Beijing Enterprises snapped up about 9 percent of China Gas in deals on Monday and last Friday, including buying a 5.4 percent holding from Oman Oil, to take its stake to 12.65 percent.

The bid for China Gas, which also counts SK Holdings (003600.KS) and Gail India (GAIL.NS) among its key shareholders, will spark further consolidation in the sector, bankers say.

Kunlun, PetroChina's gas distributor arm, has just raised $1.3 billion via an international share sale to expand its LNG distribution business, partly via acquisitions.

By leveraging their financial muscle and grips on upstream supplies, Chinese oil majors, which also include CNOOC Group, parent of offshore producer CNOOC Ltd (0883.HK), are well-placed to take over more smaller rivals, including unlisted companies.

"All the small city gas companies will be swallowed up by PetroChina or Sinopec one day," said an executive at a Hong Kong-listed gas distributor. He requested anonymity as his company purchases natural gas from PetroChina.

Smaller players such as Tian Lun Gas (1600.HK) and Binhai Investment (8035.HK), which serve regions in north China, may find it hard to expand beyond their home turf and end up as acquisition targets, analysts say.

Kunlun, which has vowed to become China's largest gas distributor, has spent heavily buying pipelines and LNG terminals from its state parent, including a gas transmission facility in Beijing it bought in 2009 for $2.85 billion.

Growth stocks

China is moving to double the share of gas in its overall energy supply to more than 8 percent by 2015, when consumption should reach 260 billion cubic meters (bcm), while coal will be cut to just over 60 percent. By 2030, gas use will hit 500 bcm, about what the European Union consumes today, according to industry forecasts.

The lion's share of that additional supply will go to new gas-fired power plants.