China Gas profit up 32.2% TO HK$1.23bln

Natural gas sales up 21.8% TO 1.83bln m3 as projects increased to 140.

Leading PRC piped-gas operator China Gas Holdings Limited (“China Gas”) announced its interim results for the six months ended 30 September 2010 with a 66.0% year-on-year growth in turnover to HK$6,537,621,000 and a 32.2% year-on-year increase in gross profit to HK$1,234,712,000. Overall gross profit margin (including the LPG business) was 18.9%. In the Profit & Loss Account (“P&L”) of the period under review, the Group recorded a non-cash and non-operating HK$178,590,000 fair value loss in the interest rate swaps that the Group entered into during 2006~2008 for part of its debts. This has been reflected in the income statement during the period under review. Net profit for the period under review was HK$123,729,000. Earnings per share were 2.69 HK cents. Excluding non-recurring gains and losses during the period under review, such as the change in the fair value of non-cash financial derivatives, the Group’s core profit after tax for the period was HK$296,169,000, a 25.5% growth against the same period last year.

Connection Fee
During the period, the Group completed connections for 386,500 households and 1,794 industrial and commercial users respectively. Income from connection fee amounted to HK$1,005,288,000, a 79.8% growth against the same period last year, with the average connection fee per user increasing to RMB2,484 from RMB2,418 in the first half of FY2010, indicating the consistency of the connection fee policy within the PRC.

As at 30 September 2010, the Group supplied gas to a total of 5,633,517 household users and 37,623 industrial and commercial users, 34.2% and 21.4% more than in the corresponding period last year respectively. Currently, the Group’s piped gas projects cover a connectable urban population of approximately 58,890,375 (approximately 18,207,805 households), representing a year-on-year increase of 15.7%. The Group had an overall gas penetration rate of 32.7% (FY2010 1H overall gas penetration rate: 28.3%).

Sales of Piped Gas
The Group sold a total of 1,888,934,000 m3 of piped gas during the review period, approximately 14.3% more than the same period last year. Of the total volume sold, piped natural gas accounted for 1,835,508,000 m3, a 21.8% jump against the previous corresponding period. The total revenue from sale of piped gas was HK$2,404,538,000, a notable 52.5% increase when compared with the last corresponding period, according to a China Gas report.

Of the total volume of natural gas sold, household users accounted for 12.8%, industrial users 64.2%, commercial users 12.9% and Compressed Natural Gas (“CNG”) vehicles 10.1%. All the segments reported substantial sales growth, with sales to commercial users and CNG vehicles users surging 62.6% and 72.5% respectively.

Sale of Liquefied Petroleum Gas
The Group sold approximately 508,482 tonnes of liquefied petroleum gas (“LPG”) with revenue amounting to HK$2,897,589,000, accounting for approximately 44.3% of the Group’s total turnover for the period.

Healthy Financial Position
As at 30 September 2010, the Group had cash on hand amounting to HK$4,258,280,000 (31 March 2010: HK$4,361,419,000). Its total bank and other borrowings amounted to HK$14,705,367,000 (31 March 2010: HK$13,672,697,000), of which HK$2,851,490,000 was from financing in relation to short-term import credit undertaken by the LPG business.

On 25 October 2010, the Group successfully issued 718,557,677 shares at a price of HK$4.31 per share (at a 6.1% discount to the price on the previous trading day). The aggregate net proceeds from the placement were approximately HK$3,070,000,000 (to be reflected in the 2011 Annual Report). China Gas will use such proceeds to reduce RMB debt of the Group and thereby lower its gearing ratio.

Business Development
Between 1 April 2010 and 31 October 2010, the Group had secured 17 new city piped gas projects with exclusive concession rights in Henan, Shandong, Zhejiang, Gansu and Liaoning Provinces and the Inner Mongolia Autonomous Region, bringing the total project number to 140.

In August 2010, the Group completed the acquisition of 56.33% of the issued capital of Zhongyu Gas Holdings Limited (“Zhongyu Gas”, and its subsidiary “Zhongyu Group”). Zhongyu Gas is a vertically integrated gas operator in the PRC. As at 30 September 2010, Zhongyu Group had secured 11 gas projects, including three in Shandong Province and eight in Henan Province, with 89% of its piped gas sales volume from natural gas. Zhongyu Gas supplied gas to a total of 389,176 household users and 1,531 industrial and commercial users, with a gas penetration rate of 42%. Between 1 January 2010 and 30 September 2010, Zhongyu Group sold approximately a total of 240,000,000 m3 of gas, of which 214,081,000 m3 was natural gas.

The Group’s LPG business mainly operates via Shanghai Zhongyou Energy. The internal restructuring of Shanghai Zhongyou Energy was completed during the reviewed period. On 26 November 2010, the Group entered into a joint-venture agreement with one of its major shareholders, Oman Oil Company S. A. O. C (“OOC”). China Gas and OOC will form a joint venture (“JV”) company in which China Gas will hold 55% interest by directing all assets of Shanghai Zhongyou Energy toward the JV. OOC is to hold 45% interest through the injection of US$131,500,000 in cash. The cooperation with OOC will significantly enhance Shanghai Zhongyou Energy’s ability to integrate the LPG business, expand the scale of downstream operations, establish a more comprehensive vertically-integrated industry chain, and thereby enhance overall corporate value. China Gas currently owns 11 LPG receiving terminals and 44 LPG distribution projects.

Business Outlook
The Group grew its businesses in steady strides during the first half year, guided by its plans and targets for the year. For the second half of the financial year, its aims are to continuously enhance profitability and enlarge market share and in turn boost the value of its businesses. China's economic growth rate in 2010 is still maintaining a relatively high level, with the growth momentum expected to continue in 2011. The impact of the domestic economic stimulus plans still remains. The demand for clean energy is still especially strong. Following the increase in the upstream supply of gas sources, the completion of the large domestic gas pipeline network and the operation of new LNG terminals in the coastal areas, the supply shortage will ease gradually, stimulating the beginning of a new round of gas demand. Demand from the industrial and commercial users and CNG vehicle users in cities covered by the Group is also expected to rise rapidly. In addition, the LPG joint-venture with OOC should speed up the pace of the vertical integration of the Group’s LPG business, and enhance the overall profitability of the Group.

Mr. Liu Ming Hui, Managing Director of China Gas, said, “The steadily growing Chinese economy has a consistently huge demand for energy. Within the next National 12th Five-Year Plan, especially the development blueprint for the gas sector, the Group will fully utilise our own established market position in the gas industry and its increasingly solid financial advantages to advance our corporate governance and risk management practices and actively promote the development of clean energy in China. As always, we will continue to contribute to society and enhance shareholder value.”