China Gas partners with insurers to invest in gas ventures via investment fund

PUBLISHED : Wednesday, 26 October, 2016, 8:43pm
UPDATED : Wednesday, 26 October, 2016, 11:01pm

China Gas, a city-natural gas distribution unit of municipal government conglomerate Beijing Enterprises, has unveiled a 10 billion yuan fund together with a nascent investment firm backed by dozens of mainland Chinese insurers.

The move represents a new funding channel for China Gas which traditionally finances its projects by raising bank loans. It will also allow insurers to diversify the channels for putting their money into investments that offer stable returns.

Insurers need such diversification to boost investment returns amid a low interest rate environment, while greater penetration of insurance products means the premiums they collect from their clients have been rising.

“It is a creative way for China Gas to offload some of its projects’ investment risk by partnering with financial investors that do not get involved in its projects’ day to day management,” Jefferies’ energy sector analyst Laban Yu told the Post.

Under a “limited partnership” agreement signed on Wednesday, the investment vehicle called China Insurance Investment China Gas (Shenzhen) Clean Energy Development Investment Fund will be set up, China Gas said in a filing to the Hong Kong exchange on Wednesday.

China Gas will contribute 30 per cent towards the 10 billion yuan to be raised, while China Insurance Investment Fund will put in 70 per cent.

China Insurance Investment, set up in December last year, is registered in Shanghai’s free-trade zone.

It had 46 initial shareholders, including 27 insurers, 15 insurance asset management firms and four private firms, and focuses its investment activities on “serving national strategic needs and the real economy”, according to the China Insurance Regulatory Commission.

The new fund will focus on investing in China Gas’ energy distribution businesses, including piped natural gas, liquefied natural gas and compressed natural gas, besides the marketing of liquefied petroleum gas derived from crude oil.

The fund has a duration of seven years and its investors can request early redemption from its fifth anniversary. To meet the redemption needs, the fund can divest projects by selling them to China Gas or third parties.

China Gas is entitled to collect a 0.3 per cent annual management fee on the fund’s capital.

China Gas has exclusive gas distribution concessions in 305 cities in mainland China, many of which require investment in infrastructure such as pipelines before customers can be supplied.

The company spent 4 billion yuan last year on developing new projects and acquiring others, according to a Daiwa Capital Markets report, which projected the outlay to be the same this year, falling to 3.8 billion yuan both next year and 2018.

China Gas had 16.5 billion yuan of net debt at the end of March, amounting to 78.8 per cent of shareholders’ equity, up from 72.4 per cent a year earlier.

Mainland China’s demand for natural gas – a cleaner-burning energy – has risen around 10 per cent in the first half of the year, up from 3 per cent for the whole of last year, after Beijing slashed regulated prices to restore its competitiveness against more pollution prone coal and crude oil-derived products.

In the decade prior to last year, natural gas consumption grew at an average of around 15 per cent annually, driven by state air pollution control initiatives and high coal and oil prices.