WHAT THE BROKER SAYS

The 400-million-yuan acquisition by Xinao Gas of a project in Luoyang, Henan, has been welcomed by CLSA Asia-Pacific Markets, even though the cost is considered high. Xinao is one of the mainland's largest privately owned piped-gas suppliers.

The price is not low as the company has to spend 90 million yuan, or 23 per cent of its capital expenditure, to construct an intermediate pipeline from Luoyang city to the west-east trunk line. However, the attraction is the connection fees, which at 3,250 yuan per household are 35 per cent higher than the average. Industrial volume will make up 70 per cent of the total and return on equity is attractive at 15 per cent for this year and 25 per cent for next. As a transition, LNG stations will be put in place for commercial start-up in October.

The city has a population of 1.5 million and potential connectable households number 400,000. Potential connection revenue is more than 1 billion yuan, stripping out coal-gas users.

CLSA estimates net gearing at the end of this year rising from 48 per cent to 60 per cent but the balance sheet does not look stretched as the company aims at only one more large project. Annual operating cash flow is 600 million yuan for this year and cash on hand was 912 million yuan at the end of last year.

With the project, Xinao's population cover will rise by 5 per cent to 31 million in 56 cities. The broker estimates an earnings upside of 2 per cent for this year, rising to 7 per cent for 2007. It maintains is 'buy' recommendation on the company, with a 12-month target price of $5.94, an upside of 11 per cent from the price on April 20. Upgrades are pending.

The counter closed at $5.20 on Friday.