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Press Release: Fitch: Solid Sales Growth Expected for China's City Gas Operators

3 Apr 2017 4:39 am
 
 
The following is a press release from Fitch Ratings: 
 

Fitch Ratings-Hong Kong-03 April 2017: Fitch-rated Chinese city gas operators - Binhai Investment Company Limited (BHI, BBB-/Stable), China Resources Gas Group Limited (CRG, BBB+/Stable) and ENN Energy Holdings Limited (ENN, BBB/Stable) - reported strong sales volume in 2016 and Fitch Ratings believes fundamentals support this growth to continue, although key drivers vary between the three companies.

BHI, CRG and ENN increased gas sales volume by 12%, 17%, and 15%, respectively, in 2016, excluding wholesale and vehicle-gas sales. The operators outperformed China's overall gas consumption growth of 6.6% , as in previous years. The country's overall gas demand growth improved in 2016 following a slowdown in demand to 5.7% in 2015 due to lower industrial activity and more competitive oil and coal prices. We expect the three operators to continue benefiting from China's push for increased natural gas use.

BHI's small scale and business concentration in the greater Tianjin area will be a dominant factor driving its volume growth. One of BHI's key customers, Tianjin Pipe (Group) Corporation, experienced business challenges in 2016, which hindered BHI's gas sales growth. BHI's management is currently working with Tianjin Pipe to mitigate additional setbacks in gas sales in 2017. BHI may significantly increase gas sales should it be able to wholesale natural gas to a new commissioned power plant that plans to begin operation in 3Q17, although these would be at a much lower margin than gas sold to residential, commercial and industrial customers.

We expect organic growth to be a key driver for CRG's and ENN's gas volume sold. CRG reported that its organic growth accounted for approximately 13.5% of its overall 15% growth in 2016. We believe CRG may achieve higher organic growth than ENN, as CRG's penetration in its areas of operations was only at 46% at end-2016, compared with ENN's 55%. Inorganic growth is unlikely to be a major driver for gas sales growth for large operators such as CRG and ENN, as economically attractive opportunities for inorganic growth have been diminishing after a number of years of acquisition and consolidation. ENN added eight new city gas projects in 2016, compared with 10 in 2015, while CRG added seven projects in 2016, compared to 15 in 2015. However, we do expect CRG to continue increasing its shareholding of project companies to expand its effective control of cash generated by these operations, as it had done in the last few years.

Both CRG and ENN are national operators with geographically more diversified footprints than BHI. In absolute terms, the commercial and industrial segments contributed most of the gas sales growth in 2016, although ENN continued to place a higher emphasis on the residential segment. ENN's residential gas sales grew at 22% (2015: 22%), compared with CRG's 12% (2015: 11%).

Fitch does not expect the vehicle-gas segment to be a significant growth driver in the short-term. We expect the oil price to gradually increase over the next few years; however, oil near current market-price levels does not incentivise vehicle conversions to gas. Operators experienced flat to lower vehicle-gas sales in 2016.

China aims to achieve 360 billion cubic metres (bcm) of domestic demand for natural gas by 2020, from around 206 bcm in 2016. This translates to around 10% growth per year. We believe 6%-7% yearly growth in the medium-term is more probable. Large city-gas operators have historically maintained higher volume growth than China's overall gas demand growth; we expect this to continue and believe large operators can maintain an average growth in the low- to mid-teens in the medium term.

Edwin Lam

- Director

- +852 2263 9975

- Fitch (Hong Kong) Limited

- 19/F, 68 Des Voeux Road

Cecilia Chan

- Associate Director

- +852 2263 9905

-

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

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- Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitchs factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitchs ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

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April 03, 2017 00:39 ET (04:39 GMT)
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