China Gas cuts sales target on acquisition delay

PUBLISHED : Tuesday, 29 November, 2016, 10:40pm
UPDATED : Tuesday, 29 November, 2016, 10:40pm

China Gas, one of mainland China’s largest city natural gas distributors, has pared its full-year gas volume sales growth target due to the longer than expected completion of an acquisition, after it posted a 1.9 per cent year-on-year rise in underlying interim net profit.

The Shenzhen-based firm, a unit of municipal government conglomerate Beijing Enterprises, recorded a net profit of HK$1.69 billion in the six months to September 30, up from HK$1.3 billion in the year-earlier period, it said in a filing to Hong Kong’s bourse after the market closed on Tuesday.

Excluding the effect of one-off and non-operational items – mainly losses from a share option litigation and the impact of the yuan’s depreciation against its reporting currency the Hong Kong dollar – underlying net profit grew 1.9 per cent to HK$2 billion.

Basic core profit per share was 40.91 HK cents, 3.5 per cent higher year-on-year.

Revenue fell 6.9 per cent to HK$13.18 billion, as the benefit from a 7.1 per cent growth in the volume of gas sold was more than offset by over 10 per cent declines in gas selling prices after Beijing slashed wholesale prices to restore gas’ competitiveness against petroleum energy alternatives.

Vice president Kevin Zhu Weiwei told reporters after the results announcement that China Gas is targeting gas sales growth of 13 per cent for the 12 months to March 31, down from 20 per cent indicated in June but still higher than the 11.7 per cent achieved in the previous financial year.

He blamed the pare-back on a longer than expected completion time for the HK$1.53 billion acquisition of 10 city-gas distribution projects from Beijing Enterprises.

The acquisition agreement, first announced two years ago, was amended in June this year due to problems with obtaining all the required local government approvals. It is now expected to be completed by year-end.

Liquefied petroleum gas profit for the six months to September 30 dropped 7.9 per cent to HK$141.8 million despite a 25.7 per cent rise in sales volume, which Zhu blamed on diversion of imports due to temporary shut downs at two ports.

He said the problems have been resolved and per tonne profit margin is expected to reach 400 yuan in the financial year’s second half, from 320 yuan in the first-half.

Mainland China’s natural gas consumption grew 7 per cent year-on-year to 157 billion cubic metres in the year’s first 10 months, up from a 2.7 per cent growth in the same period last year, according to regulator National Development and Reform Commission.

Demand growth was lifted after a 28 per cent cut to the state-stipulated wholesale prices a year ago to help restore gas’ competitiveness against petroleum-based alternatives, but still slower than the 15 per cent average in the preceding 10 years.

China Gas co-chairman Liu Minghui said the full-year growth is expected to exceed 7 per cent on the back of a greater effort to replace coal with natural gas consumption in air pollution-prone northern regions.

Beijing last year partially liberalised natural gas prices so that producers can sell at up to 20 per cent above state-guided prices. No limits are imposed on prices lower than the state prices.

This allowed the nation’s largest gas producer state-backed PetroChina to raise wholesale prices by 10 to 15 per cent earlier this month to reflect higher winter demand.

Liu expected China Gas to be able to pass on the hikes in the majority of its operating regions to customers.

“We think gas distributors could pass through most of the cost increase, as seasonal pricing is encouraged by governments, but there are likely to be some delays,” Deutsche Bank utilities analysts Zhang Hanyu and Michael Tong who have a “buy” rating on China Gas shares, wrote in a report on Monday.

They expected China’s gas sales volume growth to improve next year, citing tighter environmental regulations and growth in the number of new customers connected to pipeline networks.

But they expect distribution profit margins per unit of gas sold to fall by 6 to 8 fen per cubic metre, or 10 to 13 per cent in the next two years, as price liberalisation and competition with alternative fuel will see pipeline operators and distributors share the burden of lower prices.