Hong Kong company reporting season

China’s CR Gas to boost spending on gas projects after posting better than expected interim profit

Towngas China net profit falls during first six months on lower gas prices despite higher sales

PUBLISHED : Tuesday, 16 August, 2016, 7:38pm
UPDATED : Tuesday, 16 August, 2016, 10:57pm

China Resources Gas, a leading city natural gas distributor, expects to spend HK$1.4 billion to acquire more projects in the year’s second half, after it posted a better than expected 25.7 per cent year-on-year growth in interim net profit.

Chief executive Shi Shanbo expects second-half gas sales volume to remain strong after a 15.3 per cent growth in the first-half, indicating that the company was on track to meet its full year growth target of 15 per cent .

“In the second-half, driven by government policies encouraging gas usage and ample gas supply, we expect the national gas demand growth to reach 10 per cent, while that of CR Gas can be maintained at 15 per cent,” he told reporters on Tuesday.

The company will focus on pushing forward a proposed gas distribution joint venture in Dalian in northeast China, as well as several other projects under negotiation.

For these projects, the firm has budgeted around HK$1.4 billion of investment for the second-half, which will add to the HK$555 million already spent on eight new projects in the year’s first half, he added.

The company posted a net profit of HK$1.96 billion for the first six months, up from HK$1.56 billion in the year-earlier period, which was 7.5 per cent ahead of the HK$1.82 billion average estimate of analysts at Citi, Daiwa Capital Markets, Deutsche Bank and Morgan Stanley.

For the full year, it is forecast by 21 analysts polled by Thomson Reuters to book a 17.4 per cent net profit rise to HK$3.09 billion from last year.

First-half revenue fell 1.2 per cent year-on-year to HK$15.41 billion due to lower gas prices. The company announced an interim dividend of 15 HK cents, up 50 per cent from the 10 HK cents declared during the same period last year.

Gas sales volume grew 15.3 per cent to 8.27 billion cubic metres (bcm) thanks to an average 28 per cent cut on regulated non-residential wholesale gas price last November that stimulated demand.

The first-half volume growth was substantially higher than the 9 per cent growth achieved last year, when demand slowed due to lagging decline in regulated gas prices last year compared to rapidly falling prices of crude oil and coal.

For China Resources chairman Fu Yuning, ‘patriotism pays’ amid Vanke power struggle

Oil and coal compete with gas as alternatives even though cleaner-burning gas is encouraged by state policies for air pollution reduction.

First-half gross profit margin per unit of gas sold rose to 0.75 yuan from 0.67 yuan during the first six months of 2015, thanks to a Beijing-driven price reform on residential tariffs where higher usage homes are charged higher unit tariffs.

Chief financial officer Ken Ong said margins were also lifted by the fact that savings from lower prices of gas it procured were passed on to customers on only two-thirds of the gas it sold. Once the savings are also passed on for the remaining volumes, the margin advantage will disappear later, he said.

“The group will continue to grow steadily during the second half,” the company said in a filing to the Hong Kong bourse.

“By the end of June, the group has adopted a step-pricing system to 67 per cent of the group’s residential gas volume … once fully implemented throughout CR Gas’ projects by the end of the year, could lead to a further upside in residential [profit margin in dollar terms].”

Under the “step-pricing” system for residential users initiated by Beijing to encourage energy conservation, higher volume users pay higher unit gas prices.

Towngas marches on with Hong Kong’s ups and downs

China Resources Gas’ management has expressed confidence that its net profit would grow 15 per cent this year as it expects profits from a joint venture in Qingdao to start accruing from the fourth quarter onwards, according to a Daiwa report

On new business development, Shi said CR Gas plans to launch trial power retailing ventures in Guangdong, Hubei, Jiangsu, Yunnan and Guizhou after Beijing broke up state monopolies and allowed new entrants to the business.

“We are expanding into power sales because we can reap synergy from providing our 25 million customers electricity in addition to natural gas,” he said.

It has also discussed cooperation opportunities with sister firm China Resources Power that operates power plants, but has no concrete cooperation yet, he added.

Meanwhile, smaller rival Towngas China, 44 per cent-owned by Hong Kong’s sole piped gas supplier Hong Kong & China Gas, reported an 11.7 per cent year-on-year fall in net profit for the year’s first half to HK$564.4million.

It was 12 per cent lower than the HK$641 million average estimate of analysts at Citi, Deutsche Bank and Morgan Stanley.

Towngas pins growth hopes on China’s push for increased gas use

For the full year, it is forecast by 11 analysts polled by Thomson Reuters to book a 2.5 per cent fall in net profit to HK$1.17 billion, from HK$1.2 billion last year when the non-recurring items of unrealised foreign exchange loss and provision for the sale of a coke plant are excluded.

First-half revenue slid 12.6 per cent to HK$3.44 billion, as a 5 per cent rise in gas sales to 3.55 billion cubic metres was more than offset by lower gas prices.

The first-half sales volume growth was lower than management’s target of 10 per cent for the full year, and was in line with the 5 per cent estimated by Morgan Stanley’s analysts.

No interim dividend was declared, the same as last year.

CR Gas shares rose 0.4 per cent on Tuesday to HK$23.7 ahead of the interim results. The shares have rebounded 30.4 per cent from the year’s intraday low of HK$18.18 in January, but still remained below the all-time high of HK$27.6 in February 2014. Towngas China shares edged up 0.4 per cent to HK$4.55 on Tuesday.