[FIDES ASSETS: CHINA GAS HOLDINGS LIMITED – HKSE]
1st June 2019
Action: OVERWEIGHT for CHINA GAS (0384.HK) listed on HKSE
China Gas Holdings Limited invests in, operates and manages natural gas distribution pipelines. The Company distributes and sells natural gas to residential, commercial and industrial users, and bottles and sells compressed natural gas. China Gas also constructs and operates gas stations (as per https://www.bloomberg.com/profile/company/384:HK). The Company has an existing market capital of approximately SGD$132b, with a 52-week high of HKD$36.70 and 52-week low of HKD$19.70. The current share price as of today is HKD$25.20.
Target Price: HKD$34
Extremely-Conservative Entry Price: HKD$24.80
Potential Upside: +74.12% (close approx.)
Domestic gas consumption growth adjusted to 10% (close approx.) year-on-year and 11% year-on-year in April and 4-months 2019 respectively from 18% (close approx.) year-on-year from 2018. The dependence on gas imports still persists at a high of 42% (close approx.) in 4-months 2019. We are confident that distributors’ gas sales will continue to exceed the national average. Gas distributors are also highly likely to manage cost hurdles, given the more than sufficient discounts offered to retailers and the market.
Data from the National Development and Reform Commission (NDRC) suggests that domestic production growth in April increased by 8% (close approx.) year-on-year to 14 billion cubic metre and 4-months 2019 national production reached 58.2 billion cubic metre, which reflects a 9% (close approx.) year-on-year increase. National gas import volume was reported at 32m tonnes (close approx.), representing a 16% (close approx.) year-on-year growth, which was a decrease from 2018’s recorded growth of 32% (close approx.). Liquefied natural gas (LNG) and piped gas import growth also adjusted to 23% (from 40%) and 6% (from 20%) respectively.
We would like to think that the increase on duty from LNG imports from the US would greatly impact imports, however, this was not the case. Although China has, in retaliation, announced that the duty on LNG imports from US specifically, will be raised to 25% from 10%, which will take effect 1 June 2019, today. This however, on contrast, has insignificant impact on China’s gas market as LNG imports from the US only accounted for only 4.0% and 1.5% of total LNG imports in 2018 and 4-months 2019 respectively. We expect LNG imports from US to remain suspended as the trade war persists. Currently, the three largest LNG suppliers are, Qatar, Malaysia and Australia, which accounts for 18% (close approx.), 10% (close approx.), and 45% (close approx.) of China’s total LNG imports in 2018.
Increase In Gas Purchase Cost Transferred To Consumers
It was reported that China National Petroleum Corporation (CNPC) has raised city gate prices by 10% in non-heating season, which is simply a transfer of the increased gas purchase cost for its projects to end-users. This was corroborated by the Company’s competitor, China Resources Gas Group Ltd (CR Gas), which also reported that overall gas purchase cost hike was approximately 10%.
Gas Distributors’ Gas Sale Expansion
The main three gas distributors sales growth has exceeded national average in the last 4 years. China Gas achieved a growth of more than 20% year-on-year growth in gas sales 4-month 2019. This growth is clearly a result of a comprehensive gas distribution network in China, and the Chinese Government prioritising gas for household usage instead of commercial usages during the winter season. Additionally, we believe the operations of China-Russia east line in fourth-quarter 2019 and continuing industrial control techniques guidelines (CTG) conversions will spell well for the Company’s gas sale expansion in the near future.
Although the CNPC raised city gate prices by around 10% in the non heating season, we think this degree of increase is better than the rumoured 20% hike. Moreover, gas distributors’ price discounts to end-users are sufficient for them to carry out cost pass-throughs. According to our channel checks,
downstream clients are currently more adaptable to the gas price fluctuations, and many clients have been mandated to use gas to adhere to environmental protection requirements. Moreover, the upcoming National Pipeline Company (NPC) would help lower the bulk purchase cost of gas; hence, we maintain our view that the dollar margins
would remain stable.
Fides Assets’ Recommendation
We maintain overweight and bullish on the gas sector. Our home-run pick is China Gas with a target price of HKD$34.
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*** This report is neither an offer nor the solicitation of an offer to sell or purchase any investment. Comments are based on information obtained from sources believed to be reliable but Fides Assets makes no representation and accepts no responsibility or liability as to its completeness or accuracy.