We attended China Gas Holdings (CGH)’s reverse roadshow in Harbin on 23-24 Sep. We were quite impressed by Heilongjiang government’s determination in utilizing Russia gas. CGH is currently seizing ~70% cities’ gas distribution concession rights in Heilongjiang. As Russian gas started to be supplied to China Northeastern areas from 1 Dec, we believe CGH’s gas distribution business in Northeast China will enter golden era with rapid growth in the coming decade.
- Russian gas is coming on 1 Dec. The new pipeline supply comes with annual capacity of 38bcm, with target gas supply pace of 2/5bcm in 2019/20E, and will ramp up to 38bcm in 3-5 years, according to mgmt. Russian gas will fundamentally soothe the tightened gas supply in Northeast China, and unleash gas consumption growth potential in the area.
- Heilongjiang will be the first to benefit. As the first stop of Russian gas lands in China, Heilongjiang has made active plans to utilize new gas supply, including 1) accelerating provincial pipeline design and signing strategic framework agreement with Petro China (857 HK) to construct those pipelines which will be managed by the pending establishing National Pipeline Company; 2) kicking off coal-to-gas heating conversion; and 3) promoting distributed gas energy project. Russian gas supply to Jilin and Liaoning will come later in 2020/21 as domestic pipeline extends.
- City-gate price would be better than expected. Although not yet disclosed, CGH mgmt. and local officials expressed optimistic view on the city-gate price, suggesting a price range of around RMB1.6-1.8/cbm, which will be similar to existing gateway price of RMB1.64/cbm. Given that tightened supply has led to gas dollar margin as high as RMB1.5/cbm in Northeast China, mgmt. cares more about sufficient supply, and expects gas dollar margin to resume normal range (RMB0.6-0.7/cbm) with rapid gas sales volume growth.
- Northeast China will support growth and valuation. After 3 years’ rapid growth driven by coal-to-gas projects, market has been questioning about CGH’s future growth’s sustainability. CGH’s Northeast China development strategy will be a strong response to market concern. CGH is trading at 18.5x forward P/E, lower than its 5-yr average of 20.7x. As Russian gas delivers, we expect CGH’s new growth in Northeast China will be verified, and we believe CGH’s valuation will likely to aim higher. We see CGH’s current valuation attractive.
