China Gas posts better than expected interim profit, helped by Beijing’s war on air pollution

Revenue from connecting customers to distribution network – with relatively higher profit margin – jumps 86pc in the 6 months

PUBLISHED : Monday, 27 November, 2017, 8:06pm
UPDATED : Monday, 27 November, 2017, 11:06pm

China Gas Holdings, one of the mainland’s largest natural gas distributors, saw its interim net profit doubled, thanks to the strong demand for cleaner fuel in response to Beijing’s orders to cut coal usage in smog-inflicted northern China.

The growth was better than the company’s own projection of “more than 90 per cent” indicated on November 14.

China Gas recorded a net profit of HK$3.4 billion (US$435.8 million) for the six months to September 30, up from HK$1.69 billion in the same period last year.

“In the coming years, the group will continue to develop various projects [arising from] the ‘replacement of coal with gas’ [campaign] in north China to achieve considerable revenue and profit,” it said in a filing to Hong Kong’s stock exchange after Monday’s market close.

The profit amounted to more than half of the HK$6 billion full-year profit that the managers and staff need to deliver to obtain options to buy the company’s shares at HK$12.4 or HK$13.12 each. China Gas closed 1.7 per cent lower at HK$23.05 on Monday.

The options, if entirely exercised, would add 7 per cent to its number of issued shares.

Revenue for the six-month period grew 55.2 per cent year on year to HK$20.88 billion, lifted by a combined 73.6 per cent jump in gas sales volume – from city distribution and long distance pipeline transmission – to 8.35 billion cubic metres (bcm).

The management has raised its target for city gas sales volume growth for the 12 months to March 31 next year, from 30 per cent to 35 per cent.

The sales volume growth target for long distance pipeline transmission and trading – whose gross profit margin was half that of gas sales – has also been doubled from 30 per cent to 60 per cent.

Executive chairman Liu Minghui said faster economic growth and progress of pipeline commissioning were the main drivers for the increased targets.

“Some 40 per cent of our customer growth came from coal to gas conversion projects,” he told reporters after the results was announced.

Some 40 per cent of our customer growth came from coal to gas conversion projects
Liu Minghui, China Gas

Mainland China’s gas demand grew 18.4 per cent year on year in the year’s first nine months to 166.7 bcm.

During the six-month period, revenue collected from customers for connecting them to its distribution network – the most lucrative part of China Gas’ business in terms of profit margin – increased 86 per cent year on year to HK$4.97 billion.

The firm had 342 piped city-gas projects across mainland China at the end of September, up from 330 at the end of March this year.

Beijing has issued strict orders for 28 cities in northern China to reduce air pollution by suspending some energy-intensive industries’ production lines and converting industrial coal boilers and home coal burners into natural gas-fired units.

Besides helping industrial customers convert from coal to gas, China Gas chairman Zhou Si said in the filing that the firm had by September 30, signed agreements to conduct residential coal-to-gas conversion projects covering 2.4 million homes in villages not in jurisdictions that are already served by operators with exclusive distribution concessions.

The conversion was expected to bring additional gas sales to China Gas in the second half of next year, Jefferies’ head of Asia oil and gas equity research, Laban Yu wrote in a recent note.

In the short term, a surge in demand could result in temporary shortages this winter during cold snaps.

“China’s natural gas inventories have entered the heating season below last year’s level,” Yu wrote.

“This is a major [shortage] problem if China were to have a cold winter as households and industries have converted coal furnaces and boilers to gas.”