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China City Gas Distributors:News of potential gas cost cut a positive

研究机构:摩根大通(亚太) 研究员:Boris Kan,Elaine Wu 发布时间:2015-01-30

Gas cost cut in 1Q2015? As reported by Bloomberg, Chi Guojing, SecretaryGeneral at China Gas Association, China may reduce prices for incrementalnatural gas supplies in 1Q2015 in light of the narrowing price gap betweennatural gas and other competing fuels (e.g., LPG and fuel oil). This followsrecent news (Bloomberg, Jan 9) where another industry expert (Bai Jun, ViceChairman of China Natural Gas Industry Association) also expected a price cuton incremental gas supplies (Rmb0.15/m3, or 5-6%), while prices for existinggas supplies will increase by Rmb0.3/m3 (~10%) to align with incremental gassupplies.

Background: The NDRC raised city gate natural gas prices in July 2013 whereprices for incremental gas supplies were set at a level equal to 85% of the costof alternative fuels in (60% fuel oil /40% LPG mix) in 2H2012. No pricechanges were made on incremental gas supplies since then.

What if we “mark to market”? Our calculations suggest that, if we rollforward price levels of alternative fuels (based on actual imported prices intoChina) from Aug 2012 to Aug 2014, incremental natural gas prices will decreaseby 6% (see table on next page); If prices were to be further adjusted down tocrude oil price equivalents of US$50/bbl to US$90/bbl, incremental natural gasprices would decrease by 19% to 55%, respectively. Assuming (1) no pricechanges on existing gas supplies and (2) incremental gas supplies account for~20% of the nation’s total gas supplies, weighted average natural gas city gateprices will be adjusted to 4-11% based on a crude oil price of US$50 – 90 / bbl.

Relief to stagnant gas demand: It remains to be seen if a gas cost cut willeventually materialize. But in the event of a gas cost cut, it will be a relief to citygas distributors given the weakening gas demand growth after the gas cost hikein Aug 2014. As a reference, gas supply growth (proxy for demand) in Chinaslowed to 9% Y/Y in Sep to Dec 2014.

Operation update: We believe most listed city gas distributors only suffered amild slowdown (vs. 1H2014 levels) after the gas cost hikes in 2H2014.

Gas cost cut a positive: Share prices of listed city gas distributors haveunderperformed by 12-50% since July 2014 amidst gas cost hikes and falling oilprices. A potential gas cost hike will be a positive to the market, especially foroperators which already suffered weak demand growth in 1H2014 (CR Gas).

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