China Gas to benefit as coal to gas switch brings on millions of new users in northern areas

China Gas, one of the country’s largest natural gas distributors, expects its annual sales to reach 30 billion cubic metres in five years, thanks to the government’s effort to replace coal with natural gas consumption in northern China in a bid to improve air quality.

China Gas has targeted annual sales of 11 billion cubic metres for the financial year ended March 31, 2017.

Kevin Zhu Weiwei, vice president at China Gas, told reporters on Tuesday in Hong Kong that converting from coal to gas will add 40 million to 50 million natural gas users to the potential customer base in northern China.

The company is seeking to win 10 to 20 per cent of these users into its network and has been in talks with provincial government in northern regions.

Frank Li Yuntao, general manager of capital market at China Gas, said the company has raised its target for newly connected residential households from 2.2 million to 2.4 million for the financial year 2017, and expects 150,000 households of them to come from coal-to-gas projects.

It has also been in talks with officials in Beijing, Tianjin, Hebei, Henan, Shanxi and Shandong which plan to fully replace coal with cleaner energy in rural areas.

China Gas is confident to achieve 13 per cent year-on-year sales growth in 2017, Zhu said, noting that its sales growth in recent months rose 15 per cent year on year.

The company in November lowered its annual sales growth target from 20 per cent to 13 per cent after posting a 6.9 per cent fall in interim revenue for the six months ended September 30, 2016, partly due to the prolonged completion time for the HK$1.53 billion acquisition of 10 distribution projects from its largest shareholder Beijing Enterprises.

Zhu said that the transaction, initially expected to close at the end of 2016, is in the “final process”.

China’s natural gas consumption in 2017 is likely to post a double-digit growth from 2016, thanks to the coal-to-gas conversion, Zhu said.

China’s total natural gas consumption rose 6.6 per cent in 2016 on year to 205.8 billion cubic metres, up from 5.7 per cent annual growth in 2015, according to regulator National Development and Reform Commission.

The Chinese government has promised subsidies to rural areas for at least three years to offset the higher costs of using gas over coal for heating boilers.

The conversions have become increasingly important to drive volume growth for gas distributors in China, Deutsche Bank wrote in a research report in November.

“The conversion mainly involves industrial furnaces and heating boilers, both are more policy driven than economic driven, but the former is more related to industrial activities and the latter is used for winter heating and relies more on the subsidy,” the report said.

Pressure to make the switch comes as China’s northern cities have suffered from severe smog problems this winter. The report also noted that opportunities also lie in China’s more affluent eastern provinces, as the governments can afford subsidies to make the gas upgrade.