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China Gas:Just a bump in the road

研究机构:建银国际 研究员:Christeen So 发布时间:2014-08-14

RMB0.40/m3 ceiling on non-residential existing volume city gate price to be raised

The RMB0.40/m3 increase in non-residential city gate price for existing volume conforms to the government plan to raise the c.RMB0.43/m3 average per year in 2014-2015F. This falls on the higher bound of market expectations for a RMB0.20-0.40/m3 increase. The incremental volume price was left unchanged and until market conditions improve, no changes are likely to be made that would affect chemical fertilizer gas users. The new pricing will become effective on 1 September 2014.

Next step: aligning existing and incremental volume city gate price by 2015F

In keeping with the 2012 city gate price hike announcement, China is to reform its natural gas price scheme which is designed to align the existing volume city gate price with the incremental volume city gate price by 2015F. The incremental volume city gate price will be pegged to the market price of other fuel oils and LPG at a 15% discount. At the Q&A session, the NDRC reiterated its target of completing price reforms by the end 2015F. This implies another RMB0.48/m3 average price hike on non-residential existing volume next year, assuming the incremental volume price remains unchanged. Directly benefits upstream oilcos; short-term pressure on downstream gas operators but long-term impact limited Successive rounds of city gate price hikes should directly benefit upstream oilcos as losses from gas imports begin to narrow. We expect to see a short-lived margin squeeze at downstream gas operators as they decide whether or not to opt for dollar margin or volume growth. However, in the long run, higher upstream gas supply should underpin strong downstream demand growth. In the wake of the gas price hike, natural gas should remain at a 25-56% discount to other substitute energies except coal, meaning the risk of a sharp deceleration in near-term volume growth is low. We expect a 3-4 month lag between when the additional costs are incurred and when they are passed-through to customers. We have factored in 0.3 to 1.0ppt average gas sales gross margin erosion in 2014F across all the gas operators under our coverage. Within the gas utilities space, Beijing Enterprises Holdings (392 HK, Outperform) remains the most defensive play, in our view, as 74% of its volume derived from cogeneration plants in 2014F, which is relatively amenable to cost pass-through to end customers. We look upon Tianjin Jinran (1265 HK, Neutral) as our most vulnerable name given its single-city exposure and high customer concentration risk.

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