'The contract has yet to be signed, but the target is to get it done in the first half,' he said. Listed Zhengzhou Gas may invest in the Nanyang company, although no timeframe has been set.

Zhengzhou Gas Group is expanding as its home city and other areas in the province face increased urbanisation.

Nanyang, southwest of the province, is home to 10 per cent of Henan's 100 million people, although its 28 per cent urbanisation rate is well below the 58 per cent of Zhengzhou, which has 7.24 million inhabitants.

It had about 500,000 household customers for piped-gas services at the end of last year, compared with Zhengzhou's 629,016.

Zhengzhou's population is expected to grow to 8.1 million by 2010 with a 65 per cent target urbanisation rate, while Nanyang is aiming for 35 per cent.

Zhengzhou Gas Group is also in early-stage talks to buy controlling stakes in government gas operators in Puyang, northern Henan, which has 200,000 household customers, and Xinyang in the south of the province, with 400,000, according to Mr Sun.

'The local companies are keen to have us as shareholders so as to tap our experience and expertise,' he said. 'However, competition is tough as four to five companies are vying for stakes in each of these city gas companies.'

Zhengzhou Gas is also trying to grow as larger rivals such as Hong Kong and China Gas (Towngas) and Xinao Gas Holdings take on an increasing number of projects in the mainland.

Towngas has 60 city gas projects after its takeover of Panva Gas Holdings, while Xinao Gas has 63 projects.

The central location of Henan gives Zhengzhou Gas some advantage in accessing supplies.

Its home city is on the route of PetroChina's 3,800km west-east gas pipeline between Xinjiang autonomous region and Shanghai, while Nanyang is along a planned branch of China Petroleum & Chemical (Sinopec)'s 1,702km pipeline being built from its gas fields in Sichuan province to Shanghai.

Puyang is linked to Sinopec's Zhongyuan oil and gas field in nearby Shandong province.

The west-east pipeline provided 70.9 per cent of Zhengzhou Gas' 309 million cubic metres (mcm) of gas purchases last year, while Zhongyuan oil and gas fields supplied 25.8 per cent.

The company has secured preliminary agreements for another 50 mcm from the pipeline for this year, which should ease tight gas supply that had held back sales growth in the past few years, Mr Sun said.

Sinopec's gas field in the Inner Mongolia autonomous region has also agreed to provide 36 mcm next year, expandable to 200 mcm in a yet to be specified timeframe.

Zhengzhou Gas, meanwhile, hoped to 'strengthen our sales efforts', Mr Sun said, after sales grew 9.3 per cent last year to 286.23 mcm. Gas sales accounted for 67.2 per cent of Zhengzhou Gas' total turnover and 29 per cent of operating profit.

The company still benefits from one-off connection fees, which are charged to property developers or households for linking homes to its pipeline network. The fees contributed 30 per cent of turnover and 75.2 per cent of operating profit.

The Henan government has yet to follow Guangdong in abolishing the fee, a move that came with permission for operators to charge higher gas prices to help offset lost income.

The Henan government has kept residential gas prices unchanged since at least 2004 amid public resistance to increased rates, although last year it approved increases of between 16.6 per cent and 25 per cent increase for supplies to bus and taxi users, and to commercial and industrial customers.

Residential sales accounted for 35.2 per cent of total sales last year compared with 30.9 per cent for commercial sales, 19.5 per cent for industrial sales and 14.2 per cent for vehicular sales.

Mr Sun said social responsibility forced the company last winter to cut sales to the vehicle segment, which offers higher profit margins, amid tight supply. The company plans to add two vehicle gas-filling stations to its seven-station network this year.

Gas costs about 40 per cent less than petrol but gas sales were held back by long queues at filling stations and higher frequencies of fuel-filling trips.

Trading of Zhengzhou Gas shares will be moved to the main board on June 29.