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Gas Distribution:Faster cost pass-through vs. 2013, in line with our expectation, positive for group

研究机构:摩根士丹利亚洲 研究员:Vincent Chow,Simon H.Y. Lee,Sheng Zhong 发布时间:2014-09-09

In our report of August 13, 2014, Gas Distribution: Neutral on Tariff Hike: Buy on Potential Dip, we foresaw faster cost pass-through vs. 2013 with no margin squeeze and immaterial impact on demand. We see the first part of our thesis, faster cost pass-through, happening now.

Several provincial capitals / large cities that have approved cost passthrough have approved end customer tariff hikes: They include Beijing, Changsha, etc. (see Exhibit 1). We note that progress is faster than last year; in 2013, it took 2-3 months for Beijing and Shijiazhuang to approve end customer tariff hikes.

We estimate stable dollar margin: We observe that most cities have raised non-residential end customer tariffs by ~RMB0.4/cbm, which should be enough to cover the cost increase (see Beijing as an example in Exhibit 2).According to management of China Gas, cost in Qingdao increased by RMB0.29/cbm while selling price to C&I / CNG increased by RMB0.35/ 0.3 per cbm, respectively.

BJE management confirmed city gate price paid to upstream suppliers is based on “new volume” and “ old volume” mix last year. As mentioned in our report of August 23, 2014, 1H14 Result In Line: More Prudent Accounting vs Peers, ENN is the only operator making a provision in 1H14 results to account for the difference in “new volume” vs. “old volume.”

However, the stock opportunities are not as attractive as last year's: As highlighted in our August 13 Gas Distribution report, we think opportunities to build positions may emerge. Share prices decreased by 12-17% after the cost hike announcement in 2013 (but Kunlun/CR Gas and China Oil and Gas may suffer from higher risk). However, we note that share prices of gas distributors have declined less than last year (see Exhibit 3).

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