Upstart gas distributor Blue Sky bets on growth in natural gas consumption as China looks for cleaner energy alternatives

PUBLISHED : Monday, 27 June, 2016, 12:06am
UPDATED : Monday, 27 June, 2016, 12:06am

Upstart gas distributor Blue Sky Power said there are plenty of opportunities in China’s natural gas distribution network as the nation switches away from coal to cleaner burning alternatives, adding that it does not view itself as being disadvantaged, although its competitors have a big head start.

The company added that it also does not see itself as a rival with China Gas Holdings for asset injection opportunities from common state-backed parent Beijing Enterprises.

The small Hong Kong-listed gas sector player gained investors’ attention after last month selling HK$970 million worth of new shares and a HK$350 million convertible bond to Beijing Enterprises, which meant the latter has become its largest shareholder with a 25.5 per cent stake, which would rise to just under 30 per cent when the bond is converted into shares.

The top stake is just short of the 30 per cent threshold that could trigger a mandatory offer from municipal government-backed piped gas distribution-to-water management conglomerate Beijing Enterprises.

The addition of stakes in a newly listed gas unit by Beijing Enterprises raises the question as to whether there is any role differentiation between Blue Sky and Hong Kong-listed China Gas Holdings, since Beijing Enterprises is the largest shareholder of both.

“China Gas has its own strategy and we are a unit under state-backed Beijing Enterprises pursuing market economy-based businesses and investments,” Blue Sky chief executive Hu Xiaoming told The Post in an interview, adding it will pursue “new business models and innovation” within the gas sector.

They include the supply of natural gas-fired electricity for either residential or industrial uses to areas not connected to a power grid, which is typically complemented by locally-generated solar power.

Such projects are already being pursued by much larger rival ENN Energy.

He would not say if Beijing Enterprise has indicated whether there is any role differentiation, or if it may sell more projects to Blue Sky.

“We look forward to having more projects with Beijing Enterprises, not only in the form of asset injection but more on cooperation in the industry supply chain and distribution network regional coverage,” he said. “We don’t think too much about asset injections from Beijing Enterprises.”

Asked about potential rivalry between its two Hong Kong-listed units, Beijing Enterprises’ spokesman cited chief executive Zhou Si as saying: “China Gas and Blue Sky will be carrying out their business in different areas in China and will not be directly competing with each other.”

The spokesman did not say how asset injections or project bids may be coordinated between the two listed units to avoid conflicts.

Beijing Enterprises sold in March a gas project in Teng county in Guangxi Zhuang autonomous region to Blue Sky for HK$152 million.

Beijing Enterprises in 2013 bought a 22 per cent stake in China Gas from parent Beijing Enterprises Holdings for around HK$8.22 billion, and became China Gas’ largest shareholder.

In late 2014, Beijing Enterprises agreed to sell 12 city gas distribution projects mainly in five regions outside of Beijing into China Gas for HK$2.06 billion. China Gas announced Thursday it plans to further buy from China Gas an additional 51 per cent stake in one of the gas projects in Liaoning province for 235 million yuan.

Of the eight provinces in which Blue Sky has operations, Hainan and Guizhou are two where China Gas has no operations.

Hu acknowledges that Blue Sky is a late comer to the gas distribution business, having entered the market in 2014, a decade after some of its more established rivals. However, he stressed that as a smaller player, Blue Sky has the advantage of being more flexible.

Asked whether he is concerned that the best projects may have already been acquired by rivals, he said there are still many lower-tier cities and counties with attractive opportunities.

“Gas only took up 6 per cent of China’s primary energy consumption, far short of the international average of 24 per cent,” he said. “The replacement of coal by natural gas present huge opportunities.”

Blue Sky posted a pre-tax loss of HK$142.7 million last year if two stake disposals in gas distribution subsidiaries to third parties and other non-operating gains and losses were excluded, compared to a loss of HK$63.8 million in 2014. The company sold 17.8 million cubic metres of gas last year.

Hu expects major growth in this year’s sales volume thanks to a string of acquisitions.

China Gas made a pre-tax profit of 4.8 billion yuan in the 12 months to March 31 last year on 9 billion cubic metres of gas sales.

Blue Sky has 18 natural gas distribution projects in eight provinces, of which four are still under development.

It also has 30 liquefied natural gas refuelling stations serving heavy vehicles and compressed natural gas stations supplying lighter vehicles.

The company has budgeted 100 million to 200 million yuan of spending on project infrastructure build-out for the next 12 to 18 months, Hu said.