Falling margin fails to hold back ENN Energy's expansion plans
Hebei-based firm hopes to further expand its vehicular natural-gas refilling station network amid a trend to switch to cleaner-burning fuel
ENN Energy, one of the mainland's largest city piped-gas distributors, has planned further expansion of its vehicular natural-gas refilling station network to capture business from a trend to switch to cleaner-burning fuel, despite a drop in profit margin due to higher gas prices.
The Hebei-based firm, controlled by mainland entrepreneur Wang Yusuo, aims to add 40 compressed and 100 liquefied natural gas stations this year. They totalled 448 in 2013, compared with the firm's objective set last year to have 500 by the end of next year.
Vehicular natural-gas refilling was a high-growth segment since domestic price controls meant natural gas was about 40 per cent cheaper than petrol for vehicle owners on a same-mileage basis, said ENN deputy chairman Cheung Yip-sang.
But with Beijing indicating last year that it aimed to gradually raise domestic natural gas prices so that they would reach 85 per cent of the import prices of alternative fuels such as liquefied petroleum gas and fuel oil by 2015, the price advantage of natural gas has been eroded.
This could halve the price differential to 20 per cent late next year, according to analysts' expectation that natural gas prices will be raised by 15 per cent this year and next to achieve Beijing's objective to promote conservation and higher domestic output.
The market would have difficulty stomaching another substantial rise this year, hampering the mainland's goal to tackle pollution by promoting gas use, Cheung warned.
Already, ENN's operating profit margin from vehicular natural-gas distribution slid to 16.2 per cent last year from 21.1 per cent in 2012. For each cubic metre sold, operating margin fell 17.7 per cent to 45.9 fen (57.8 HK cents) since it could not pass on to end-users all the gas cost increase by upstream suppliers.
"At the early-stage development of the vehicular gas market, profit margins have been good, thanks to the pricing advantage," Cheung said. "But as gas price is gradually liberalised and rises, it is normal that its profit margin is squeezed."
Still, vehicular gas sales surged 34.2 per cent to 3.1 billion yuan last year, accounting for 13.4 per cent of the total, up from 12.8 per cent in 2012 but behind ENN's goal of 20 per cent next year. Cheung said he saw no problem for the ratio to reach 17 to 18 per cent next year, given the fast expansion of its distribution network.
The firm aimed to have 750 to 800 compressed and liquefied natural gas stations next year, up from 600 this year, he said.
It costs three million to five million yuan to build a compressed natural gas station and five million to eight million yuan for a liquefied one. Liquefied natural gas stations are mainly in the suburbs and target mostly heavy-duty trucks and inter-city buses, while compressed ones serve mostly vehicles within a city.
Cheung expects more than half of its stations to be built within existing petrol stations run by the three state-backed oil giants by next year. While this involved more investment, their throughput growth was bigger since they tended to be dedicated to large logistics operators, he said.
ENN reported a 20.8 per cent gain in underlying net profit to 1.94 billion yuan in 2013.