Gas distributors fall on imminent price increase

PUBLISHED : Wednesday, 13 August, 2014, 11:24am
UPDATED : Wednesday, 13 August, 2014, 11:24am

Shares of mainland distributors of natural gas fell on Wednesday morning after the central government announced it would raise gas prices from September 1.

Investors are concerned the firms may have difficulty in passing on the higher cost to end-users.

ENN Energy led the decline with a drop of 4.1 per cent to HK$57 at 10.22am. China Resources Gas lost 1.7 per cent to HK$25.35, while Beijing Enterprises slid 1.8 per cent to HK$72.05, and China Gas eased 0.5 per cent to HK$15.72. The Hang Seng Index was up 0.3 per cent.

The National Development and Reform Commission, which regulates the energy industry and prices, said on Tuesday that non-residential gas prices would be raised by 40 fen (50.3 HK cents) per cubic metre at the city-gate level. Prices for residents and fertiliser makers will remain unchanged.

Higher prices may weigh on China’s city gas distributors over producers
Barclays analysts

The industrial sector typically accounts for about two-thirds of city gas distributors’ sales.

“Higher prices may weigh on China’s city gas distributors over producers, as margins soften and volume growth ebbs,” Barclays’ analysts said in a research note on Wednesday.

Credit Suisse analysts said in a note the price increase was at the high end of market expectations and that distributors will have a harder time passing on the costs this time around.

“The city gas sector corrected by 10 per cent following the [price] hike in July last year but recovered on the back of [an over 95 per cent] pass-through to end-users,” they said.

“A similar success rate may not be warranted this time with weaker industrial demand.”

They noted industrial natural gas demand grew only 9 per cent year on year this year’s first half, compared with 13 per cent in the whole of last year.

If distributors could pass through 90 per cent of the cost increase, Credit Suisse estimated the firms would suffer a 2 per cent fall in annualised profit. That would rise to 4 per cent if they could pass on 80 per cent, and 6 per cent if only 70 per cent could be passed on.