China Gas Utilities:Takeaways from Beijing and Hebei gas trip

Three-day gas trip in Beijing and Hebei

    We attended a two-day trip in Hebei organized by ENN Energy (2688 HK, Buy), and visited Jinhong Energy (000669 CH, Not rated) and Jingneng Clean Energy (579 HK, Not rated) in Beijing. We summarize the key takeaways below.

    ENN: Distributed energy projects

    We visited two distributed energy projects in Langfang and Shijiazhuang in the Hebei province. In both the projects, ENN provides power, heating and cooling to end users, with an energy utilization rate of >80%. For the Junlebao project in Shijiazhuang (with annual gas consumption of 28.6mn cm), the total investment is c.Rmb80mn with a project IRR of >12%. Compared to the pure gas sales business, ENN can earn an additional profit via 1) selling high value-added products (power, heat and cold water); 2) enhancing energy utilization rate; and 3) providing operational and maintenance services. According to management, ENN plans to invest in 10 distributed energy projects each year, with an annual capex budget of Rmb500mn.

    ENN: Rural coal-to-gas projects

    We visited Housunwa Village in Langfang, which is within the “no-coal” area set by the Hebei government. The village has completed the coal-to-gas conversion in October 2016 and the connection fee (100% borne by the local government) has been paid to ENN. Based on our checks with the villagers, a 100-square meter house usually consumes c.1,500 cm gas for winter heating purposes with a cost of c.Rmb4,000/year, which is >Rmb1,000 more expensive than using coal. The government has promised to subsidize up to Rmb1,000/household for gas cost. However, the subsidy for the last winter has not been paid to the villagers yet. The villagers are satisfied with the conversion as 1) gas is cleaner and there is no need for storage; and 2) currently coal is not available in the “no coal” area. ENN charges a c.Rmb0.7/cm dollar margin for gas sales, but considering the high investment and operational costs, the estimated project IRR is c.13%, below its >15% IRR for urban projects. According to management, ENN will continue to be selective in rural opportunities, preferring those projects with high subsidy visibility and near its existing pipelines.

    Other key takeaways from Beijing meetings

    Jinhong Energy’s 1H17 gas sales volume increased c.30% yoy, mainly driven by 1) coal-to-gas conversions in Hebei and Shandong; 2) stronger industrial activities of its major customers, mostly in glass, ceramics and steel industry; and 3) the fast growth of its LNG direct supply business. This is a positive read-across for other gas distributors we cover, indicating a robust volume growth recovery in China, especially in key coal-to-gas regions.

    Jingneng Clean Energy expects moderate pressure on its utilization hours as the government wants to increase power import from UHVs. It is possible to trim the benchmark utilization hours to 4,300 from 4,500 but it is still in discussion. The potentially lower utilization may put some pressures to gas sales volume of BEHL (392 HK). The company is targeting a 14% capacity CAGR in next four years, mostly through wind and solar. The asset injection of gas power plants in Guangdong is likely but without timetable.