China Gas Utilities:Qingdao cuts retail prices,limited impact on gas distributors

DB comments

    This echoes the notice issued by Shandong Provincial Price Bureau in earlyJuly: In response to the NDRC’s notice of Strengthening Supervision ofDistribution Tariffs issued in Jun, Shandong’s Price Bureau issued a notice in earlyJuly to cut the intra-provincial pipelines by Rmb2cents/cm and cap the distributionmargin at Rmb0.9/cm. Based on our estimates, Qingdao’s city-gate price forpiped gas is Rmb2.23/cm (provincial gate price of Rmb1.98/cm plus transmissiontariff of Rmb0.25/cm). After the end-user tariff cut, the non-residential distributionmargin cap is Rmb0.9/cm, in line with the requirement set by provincial pricebureau.

    Limited impact on gas distributors: ENN, China Gas, CR Gas all have concessionareas in Qingdao city. According to the companies, they are all selling at pricesbelow the caps as they are offering discounted prices to stimulate gas usage:ENN’s ASP is RMB3.04/cm with a Rmb0.9/cm dollar margin; CR Gas’ ASP isRmb2.9/cm with a Rmb0.6/cm dollar margin; China Gas’s ASP is Rmb3.1/cm witha Rmb0.8/cm dollar margin. In other cities within Shandong, the average dollarmargin is Rmb0.7-0.8/cm, therefore the impact should be limited.

    We expect margins to trend down gradually and mildly: We believe that over2H17-1H18, nationwide policy roll-outs may take a pause but more regionalexecution will follow (See more details in our latest sector report, published on 19July). Apart from the executions of 7% ROA cap, there are possibly some otherforms of margin/return controls including dollar margin caps or benchmarks atthe provincial/city level. Overall, we expect a mild and gradual margin squeezefor gas distributors over 2017-19E, which is driven by return regulations by localgovts and discounts offered by gas companies to stimulate gas usage. We havebuilt in RMB3-5cents/cm decrease in C&I margins over 2017-19E, which is moreconservative than mgmt guidance.

    Lower prices are positive for demand, recommend laggards: A lowertransmission/distribution margin will further support our positive outlook onvolume growth which has accelerated to 15% yoy in 1H17 at the nationwide level.