China Gas hit hard by yuan depreciation, lower prices, asset writedowns

Hong Kong-listed China Gas Holdings has reported a 32.6 per cent fall in annual net profits, which officials blamed on hefty losses arising from the yuan’s depreciation, lower gas prices, and the writedown of various assets and projects.

Net profit for the 12 months to March 31 amounted to HK$2.27 billion, down from HK$3.37 billion the previous year and compared to the HK$3.24 billion average estimate of 14 analysts polled by Thomson Reuters.

Revenue dropped 8 per cent to HK$29.14 billion, due to lower prices for the natural gas and liquefied petroleum gas it sells, officials said.

China Gas is involved in the distribution of city gas and natural gas, and the construction of long-distance natural-gas pipelines.

“The decrease in [net] profit was mainly due to the combined effect of one-off or non-operational factors [worth a total] HK$1.44 billion,” it said in a filing to Hong Kong’s stock exchange.

Excluding those factors, it said core net profit grew 11.9 per cent to HK$3.72 billion.

Those extra costs included HK$608.72 million of exchange losses due to the yuan’s depreciation against the US dollar, HK$119.7 million of one-off fees to replace its US dollar loans with yuan loans, HK$287.3 million in court-ordered damages paid to former directors in relation to disputes over share options, and the closure of two chemicals operations, which cost the company HK$393.8 million.

The announcement also revealed the company is buying the 49 per cent it does not already own in two firms that operate 13 city-gas projects in Hubei and Anhui provinces, from South Korea’s gas-fired power generator SK E&S.

The 13 will be added to its existing 305, which excludes 11 in the process of being acquired from its largest shareholder Beijing Enterprises.

SK E&S is part of the SK Group, which owns a 15.8 per cent stake in China Gas.

Vice president Kevin Zhu Weiwei said the acquisition price represents 8.56 times the projects’ earnings, and that the expected closure of the two firms’ management offices could save up to HK$20 million a year.

Elsewhere in the results announcement, the company said its total piped gas sales last year grew 10 per cent to 10 billion cubic metres, in line its target revised down last year from 12 bcm, but slower growth than the 11.6 per cent it achieved in the previous financial year.

It said the drop was due to belated cuts to state-guided gas prices, amid sharp falls in oil prices, which meant gas had lost its competitiveness for much of the year.

In November, the Beijing government slashed the average benchmark non-residential wholesale gas prices by 28 per cent, and allowed producers and wholesalers more flexibility to set their prices.

China Gas Chairman Liu Minghui said the company is now targeting total gas sales to grow 20 per cent in the 12 months to March 31 next year to 12 bcm, down from a 14 bcm goal indicated earlier.

He said gas sales growth between April and June had been in line or better than national consumption growth.

Mainland China’s gas sales grew 10.6 per cent in the year’s first five months, according to regulator National Development and Reform Commission, up from around 4 per cent last year and 8.6 per cent in 2014 but short of the average of 15.3 per cent for the past 15 years.

Asked what impact the government’s plan to harmonise residential and non-residential gas prices over the next few years would have, Liu said he believed it would be positive for distributors, since it would eliminate cross-subsidies and lead to more market-based pricing.

“In most countries, residential prices are higher than industrial and commercial prices since large customers enjoy bulk purchase discounts,” he said.

“In China, it is the reverse due to cross-subsidisation. This will certainly be reformed, but it will take time since consumers’ expectations need to be adjusted.”

The spelling of the name of China Gas’ chairman in the sixth paragraph from the bottom of the story was corrected to Liu Minghui