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China Gas falls after net profit plunges

China Gas Holdings fell 10.6 per cent to HK$3.97 yesterday in Hong Kong trading after the mainland gas supplier reported a 78.5 per cent plunge in interim net profit.

Its shares dropped as low as 20.9 per cent at one point in a heavy sell-off that saw 239 million of the company's shares changing hands.

In a report dated November 29, Citi lowered its estimate for China Gas' earnings per share for this fiscal year by 42 per cent to 11 HK cents and by 17 per cent to 20 HK cents for the next fiscal year. It rated China Gas a 'sell' and 'medium risk'.

For the six months to September 30, China Gas net profit fell 78.5 per cent to HK$92.98 million, far below a median Bloomberg forecast of HK$301 million by three analysts, despite a 66 per cent rise in turnover to HK$6.54 billion.

China Gas attributed the net profit drop mainly to interest rate swap contracts entered during 2006 and 2008, which generated an expense of HK$178.59 million.

'We are not too concerned about the swap loss as this mark-to-market loss is non-cash and non-operating,' Chris Shiu wrote in a Goldman Sachs report. The interim operating profit of China Gas rose 37 per cent to HK$741 million, accounting for 47 per cent of Goldman Sachs' full-year estimate for 2011.

China Gas said that another cause of the net profit drop was the sharp rise in the price of international liquefied petroleum gas (LPG) in the second quarter, which caused the company's LPG imports to incur a cumulative loss of HK$106.47 million by September.

A Deutsche Bank report by Eric Cheng and Michael Tong said the loss of China Gas' LPG business widened year on year in the six months ended September 30 to HK$106 million with a -3.7 per cent operating margin.

'The 10 per cent gross margin guidance for fiscal year 2011 now looks very difficult to achieve.'

A Core Pacific-Yamaichi report by Lee Yuk Kei said the loss of China Gas' LPG business was HK$2.4 million one year ago. 'The key negative earnings surprise was the LPG distribution business. We originally forecast the margin to modestly improve for the first half [the six months ended September 30].'

'We worry management's ambitious plan of spinning off its LPG business in three years could be at risk, given the unsatisfactory performance of the LPG operation.

'Although China Gas restructured [its subsidiary] Shanghai Zhongyou by selling a 45 per cent stake in Zhongyou to Oman Oil to strengthen the import of LPG, the effect has to be wait and see.

'We prepare to lower our earnings forecast for China Gas,' Lee wrote.

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