China Gas plans LPG unit spin-off
Hong Kong-listed utility China Gas Holdings is in talks to sell a stake in its liquefied petroleum gas (LPG) subsidiary, Shanghai PetroPower, to the mainland's largest oil producer, PetroChina, in a deal that would lead to a separate listing of the subsidiary, according to a senior official.
The potential spin-off of the 98 per cent held subsidiary by selling A shares on the Shanghai Stock Exchange could happen any time in the next three years, China Gas chief financial officer Eric Leung Wing-cheong said.
PetroChina, which has 28 oil refineries and an annual output of six million tonnes of LPG, was eyeing a tie-up with Shanghai PetroPower through subsidiary CNPC Kunlun Natural Gas to secure access to a platform for storing, processing, wholesaling and retailing its LPG, he said.
For China Gas, a deal would enable it to meet sooner its target of selling 2.2 million tonnes of LPG by 2011, as well as security of supply, Leung said.
'The alliance with Kunlun Gas will ensure security of supply of both types of gas [LPG and liquefied natural gas],' he said. 'Supplies have been tight in the past few years, and the recent snowstorms made the situation worse.'
Should the tie-up proceed, it would provide a new source of growth to China Gas, which has spent the past decade building a portfolio of 121 natural gas projects in 110 mainland cities from Guangdong to Heilongjiang.
It will also add yet another strategic partner to China Gas, which counts among its key shareholders cross-strait trade promoter Taiwan Affairs Office of the State Council, China's No 2 oil firm Sinopec, Oman Oil, Gail (India), SK Group of South Korea and the Asian Development Bank.
Although the mainland's LPG market was competitive and the barrier to entry to wholesaling and retailing low, Leung said China Gas was positioned as a vertically integrated LPG supplier.
For example, Shanghai PetroPower sources LPG from PetroChina and the Middle East, stores the fuel in four areas in Wenzhou in Zhejiang province, Nansha in Guangdong, Fangchenggang in Guangxi and Jingjiang in Jiangsu, and distributes it to coastal cities.
Leung said the vertically integrated business model would allow a gross margin for the LPG business of as much as 17 per cent by 2012, slightly higher than the 15 per cent average margin of a typical piped-natural gas project.
Shanghai PetroPower president Pang Yingxue said the firm planned to spend about 200 million yuan (HK$227 million) buying or co-operating with about 300 existing retailers of bottled LPG next year.
'There are so many retailers that consolidation is inevitable,' Pang said. 'The downstream market is volatile, but it is another story from the perspective of a company with upstream supply, middle and downstream distribution.'
Key player Towngas China has withdrawn from wholesaling and retailing bottled LPG because of eroded margins and punishing competition. But Pang said there were a limited number of firms with storage facilities and stable upstream supplies and that local governments refused to grant licences for the storage of the fuel for safety reasons.
Leung said PetroChina promised not to compete with China Gas on any other LPG business. He allayed some analysts' fears that the LPG business would cannibalise China Gas' existing piped-gas projects.
'China can't rely on a single fuel source, whether it is natural gas or petroleum gas,' Leung said. 'It is too uneconomical to build gas pipelines in rural or suburban areas where bottled LPG has a big role to play.'
Macquarie Research, which upgraded its price target for China Gas to HK$3.90 from HK$2.50 on Thursday, said the company's LPG business was volume-driven and would become a substantial earnings contributor. But it expressed concerns about risks in the utility's execution of the LPG project and the industry consolidation.
