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Denise Tsang

THREE NEWCOMERS to Hong Kong's small contingent of gas stocks are watching their share prices go wild.

A market for decades dominated by one player - Hongkong and China Gas (Towngas) - is now putting its money on the potential of smaller mainland gas suppliers.

A year ago, Wah Sang Gas Holdings went public on the Growth Enterprise Market. It has been joined by Xinao Gas Holdings, listed on the main board, and Panva Gas Holdings, also a GEM stock.

While not competing geographically, they are chasing after a booming sector that urgently needs private investment.

The central Government has an ambitious plan to boost economic efficiency and curb environmental damage with greater use of natural gas, which accounts for only 3 per cent of the country's energy consumption. The global average is 22 per cent.

According to HSBC Securities regional utility analyst Ivan Lee, this adds up to a natural gas market that is 'under-penetrated, coupled with favourable government policies toward energy'.

These three gas companies may be in their infancy, but the market has taken notice.

In the past 12 months, Panva shares rocketed 353 per cent to HK$4.10, while Xinao shares are up 114 per cent to HK$3.35.

Things may not be as rosy as they seem, however.

While the massive potential of the sector is acknowledged, investors have been warned to take a closer look at the companies' fundamentals.

'Investors should observe companies' financial health by reading between the lines,' Hong Kong Society of Accountants vice-president Edward Chow Kwong-fai said.

The warning hinges on a sweetener offered by the central Government to encourage investment in downstream gas supply.

Gas suppliers are allowed to charge end-users a one-off fee for connecting to their services, the so-called 'connection fee'.

Service providers widely regard the connection fee as a key government policy to ensure a return on private investors' cumbersome spending in gas infrastructure.

Local governments are allowed to team up with foreign or private investors to avoid a massive spending burden on this infrastructure.

For example, a US$5.6 billion project to build a 4,200km pipeline will bring natural gas from Xinjiang in the west to Shanghai by 2004.

International oil giant Royal Dutch/Shell is leading a consortium, which also includes Towngas, in building the pipeline and exploring upstream oil works jointly with local partner PetroChina, China's largest oil firm.

'Mainland government research shows that to make a pipeline profitable, every six yuan spent in downstream gas will only be able to offset one yuan of spending in upstream infrastructure,' Xinao executive director Wilson Cheng Chak-ngok said.

However, the connection fee booking policy varies among the listed companies and raises concerns on ballooning account receivables.

Wah Sang is a prime example.

According to the company's annual report for the 12 months to March 31 last year - the latest available information - trade receivables shot up 89.69 per cent to HK$89.46 million on turnover which more than doubled to HK$210.30 million, against HK$104.09 million a year earlier.

Propelling the sharp growth in turnover was income from 'gas pipeline construction', the term commonly used for the connection fee.

This income nearly doubled to HK$131.36 million last year, from HK$62.77 million previously, and accounted for 62.46 per cent of the group's income.

Accountants also expressed caution over Wah Sang's cash flow. Net cash inflow from operating activities stood at HK$26.85 million last year, which was way below operating profit from operating activities of HK$74.06 million.

'The wide discrepancy between the actual cash inflow and operating profit is unhealthy and shows aggressive billing policy,' one accountant said.

'To ensure stronger cash flow, what Wah Sang needs is new projects.'

Xinao, which mainly distributes piped gas in Shandong's Liaocheng city, Beijing and Hebei's Langfang city, also relies heavily on the connection fee.

About 76.8 per cent of the company's turnover for the 12 months to December 31 last year came from the connection fee and the substantial contribution is expected to continue in the next few years.

Over time, analysts expect the connection fee to shrink, along with the growth in the number of customers.

As more people are connected, the firms must realise they cannot rely on the 'sweetener' fee forever. Investors, in turn, may get a clearer picture of the firms' actual performance.

'Which company will emerge as a winner? Time will tell,' Mr Chow said.

Graphic: natgasgbz



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