Investment over the border is seen by the utility as a way of diversifying from its core market - a mature Hong Kong Hong Kong and China Gas (Towngas) is stepping up its efforts on the mainland, unveiling yesterday plans to plough another $1 billion into the market next year. It also announced three piped-gas projects in Shandong province and a possible separate listing of its mainland portfolio in 2006. The moves constitute an attempt by Towngas to diversify away from its core, mature Hong Kong market, according to managing director Alfred Chan Wing-kin. The gas utility yesterday said first-half profit grew a weaker than expected 6.5 per cent to $1.8 billion as protracted deflation and a dwindling supply of new flats curbed growth in user numbers and sales. 'We expect the profit contribution from our mainland projects to multiply in the next three years as new projects come on stream,' Mr Chan told the South China Morning Post yesterday. Earnings at the utility's mainland operations jumped 66.66 per cent to 35 million yuan (HK$32.79 million) in the first half. The three new Shandong projects will boost its portfolio in the province to seven. When complete, Towngas would have 19 facilities in the mainland, Mr Chan said, although he declined to reveal additional details about the upcoming projects. To capitalise on deregulation of the mainland's piped-gas market, the company planned to invest about $1 billion in the country next year, following an accumulated investment of about $3.4 billion over the past six years, he said. 'The more we invest in China, the higher the return,' Mr Chan said. 'Still, we will continue to invest in Hong Kong, at about $600 million next year, to upgrade gas pipeline networks.' Unlike Hong Kong electricity utilities, which are allowed to earn a regulated return of up to 15 per cent per year on their fixed assets, core profit at Towngas is tied primarily to sales and higher tariffs. During the first half, turnover rose 8.21 per cent to $3.97 billion despite weak sales of piped naphtha gas and frozen tariffs. Gas sales grew 2 per cent despite the Sars outbreak. But the poor retailing and catering sectors hurt equipment sales and maintenance costs were higher. 'We will keep tariffs frozen next year for the seventh consecutive year,' Mr Chan said. 'I believe the economy will continue to be weak and the operating environment is getting tougher and tougher for Towngas.' Operating profit before return on investment shrank 0.59 per cent to $1.91 billion. The net profit figure included a one-off pre-tax gain of $200 million from office sales at International Finance Centre Two, in which it owns a 15 per cent stake. The interim dividend was left unchanged at 12 cents per share. Earnings per share jumped 6.71 per cent to 31.8 cents from a restated 29.8 cents last year. A provision of $74.5 million for deferred taxes was made in accordance to Hong Kong's revised accounting policy. JP Morgan analyst Edmond Lee said Towngas profit would rise in the second half as the economy improved and tourism picked up. A Thomson First Call poll of 21 analysts found a consensus estimate of $3.33 billion for full-year profit, up 8.18 per cent from last year.