Earnings Call: H1 2025

Nov 29, 2024

Dear analysts, dear investors, welcome to China Gas Holdings Limited FY 2024-2025 interim results announcement for investors and analysts in the form of webcast and conference call. Now, first, management with us today in person, they are Mr. Liu Minhui, Chairman and President. Mr. Huang Yong, Executive Director, Executive President. Executive Director, COO, Mr. Zhu Weiwei. Executive Director, VP, Ms. Liu Chang. VP, Mr. Li Jing. Mr. Rock Tan, GM Capital Management. Now, opening remark by Mr. Liu Minhui. Please go ahead. Thank you for attending our conference call today in person and on the cloud. Thank you for being here with us. To review our performance for the half year of FY 2024-2025. For the previous one to two years, our economy witnessed quite some headwinds in this ever-changing landscape in the market. With all of these challenges facing us, China Gas is committed to progressing as business, facing all of these challenges head-on. Today, on this results announcement, we are now presenting our results to analysts and investors. For today's presentation, for all of those interested in the changes and advancement of this industry, we are also looking forward to all of these exchanges we are going to enjoy with all of you. Thank you. That will wrap up the opening remark by Mr. Liu, and now moving on to the presentation by Mr. Kevin Zhu, our COO. Dear investors and analysts, good evening. On behalf of China Gas, I would like to present you our interim results for the half year of FY 2024. For my presentation, it will cover 5 parts: business highlights, operational highlights, key financials, China stimulus policies, and what it means to China Gas, as well as the outlook. First of all, business highlights. For the half financial year, we have witnessed steady cash flow. Free cash flow, HKD 2.22 billion. Another highlight is the double-digit growth of our VAS. Our revenue went up 11.6% year-over-year from HKD 1.8 billion-HKD 2.0 billion. Our operating profit up 15.4% year-over-year from HKD 0.87 billion-HKD 1 billion. The third highlight is the recovery of our dollar margin. Our dollar margin went up by HKD 0.02 per cubic meter to HKD 0.59. The fourth highlight, year-over-year spike in C&I users, especially for commercial users. By the bottled to piped gas and the booming of micro small businesses, we have driven up our commercial user base. As well as for the partnerships with industrial groups and commercial and government agencies, we have expanded our industrial user base. This half financial year witnessed our new C&I users of 26.2 thousand, up 9.6%. This has already laid a solid foundation for the gas volume for the second half of the financial year and going forward. At the same time, we would like to update you how we have rode on policies to propel residential price hikes. As of today, this is where we are now for price pass-throughs. Over 20 provinces have issued price pass-through policies of natural gas. Some cities are actively working on the details of the implementation of the policies. Some cities and counties are implementing the policies according to the national regulations. The half financial year, we have witnessed over 20 more cities that have delivered price pass-through. Another 12 cities covered by China Gas concession rates also hiked their residential prices since October. In total, for the financial year, the number is 32 more cities. Price hikes for residential users, that would be HKD 0.29 per cubic meter. The price hike for residential price would be HKD 0.08 per cubic meter of residential prices, which means that these hikes has pushed up the price by HKD 0.08 and the ratio of residential price pass-through is 62%. That will wrap up the price pass-through. Now, moving on to gas volume. Here, we have been a slight growth in this regard from 16.7 BCM to 17.1 BCM. For the breakdown, city gas went up by 1.4% from 9.2 BCM-9.3 BCM, and direct supply went up by 0.3%. The gas volume by user will be, first of all, for residential users, 2.59 BCM, which went up by 3.6% year-on-year. Commercial, 1.59 BCM went up by 4.8%. Industrial, up by 0.9% to 4.974. This is a decrease of 24.7%. Let's look at the breakdown of sales volumes. Industrial is up to 53% in the mix, while commercial is 17%. While for residential, 27.7%. Gas station, 2.4%. This is the mix of our gas sales. Coming up, let's take a look at the review. We can see several characteristics. First, residential sales is growing steadily with increasing customer base. That help us to drive the stable growth of residential gas sales. Second, for the commercial sales, that is also stable. Catering and hotel give us a stable demand. Different localities have promoted the bottled to piped gas policies, as we presented before. This will give us more commercial demands in the coming years. This is not fully reflected in the first half. Usually, in the first half, we have new connections, and their usage will be reflected in the second half. This is commercial side. For the industrial sales, we can say that it is waiting its resumptions. As we can see, the property market in China, it continues to be weak. The related industry, say for example, ceramics, glass, and steels are still slowing. Gas consumption is at decrease for 21%. Traditional industry areas, say for example, North China and Northeast of China, as we can see, some industrial users have halted or delayed their production. That has resulted in the weak gas sales in these regions. In North and Northeast China, our industrial sales takes up about 20%. That dragged our sales to the industrial segment by 2.9%. We can also see that in China Gas, we are different to other listed companies. Our first interims end at September, that is also a weak season. That does not include the heating season. Also, we have alternative energy that is competing for gas sales for industrial users. This is what happened in the industrial segment, and that also explains why there is only a slight increase of 0.9%. Okay. Coming up, let's look at tariff and dollar margins. In the general picture, you can see that the four types of customers, the tariff for residential is increased to 2.85 CNY. For industrial users, it is up to CNY 3.3. Commercial, up to CNY 3.46. Gas stations, up to CNY 4.01. The ASP increased by CNY 0.01 to CNY 3.22. Average procurement unit cost is down from CNY 2.64 to CNY 2.63. Our average dollar margin, as you can see, it's up by CNY 0.02 because of the increase of ASP and the reduction of APUC. As you can see, the dollar margins among the four segment are also different. For residential, we have CNY 0.32. That is CNY 0.01 up. For industrial, we have increase of CNY 0.02. For commercial users, it's up by CNY 0.06. For gas station, it is CNY 1.13. It's down by CNY 0.01. As you can see, we have pass-through mechanism and the increasing selling price and the reduction of procurement cost. For residential users, we have pass-through and added an incremental part of HKD 0.08, as we mentioned. Already we do not have the distinction between residential and non-residential gas in our procurement. That help us to get a better regulated price. For the dollar margin, as you can see, our procurement has increased, but for our selling price, that is a blended area that gives us the tariff and the dollar margins coming up. Let's look at the policies implementation. Here, we would like to further elaborate on pass-through mechanism. Price pass-through help us to improve our dollar margin, which has been reflected in the residential sales. In terms of retail selling price, we have the formula of weighted average procurement cost plus total distribution return. However, in different regions, we have different distribution cost, and there are varying distribution asset. We need to set and confirmed distribution returns in different localities for reasonable return. This is a differential, differentiated pricing according to different locality, and this is also the implementation of the price pass-through mechanisms. Different distribution returns can be seen within a region. Say, for example, it is different between city and rural areas, and also the industrial consumption intensive and the commercial consumption intensive cities are different in terms of distribution return. This is how we set the retail selling price, and this is also the formula we have been promoting its implementation. This is the policy side and at the same time, we have been promoting cost reviews in different localities. Cost reviews is correlating to our distribution asset. We need to set the distribution returns according to cost reviews. During the cost reviews, we'll be able to increase our distribution asset. Previously, the governments will review the price every 3 years, but now we are advocating for the alignment of the latest distribution returns to the cost reviews. Cost reviews will be able to better reflect the real situation of the distribution asset. We have a 7% of ROA to ensure a reasonable return to city gas companies. In this context, our returns in the future for gas companies will be more dependent upon our exercises and our distribution pipeline networks. In the future, these characteristics will be ever more prominent. With the price pass-through mechanism, we have 2 strategies in place. First, we are improving our gas resources channels so that our bargaining powers with the upstreams can be strengthened. While at the same time, we have been consolidating our supply chain resources, like for example, our LNG trading company partners and also our pipeline tradings. We have been using all our resources to build the pool for our companies for better synergies, and at the same time we have the 2nd strategies to stabilize our volumes. As you can see, the macro economy of China has been improving, so we expect in the future, the industrial gas sales will be able to climb up slowly. This is what we can see from the macro side. Indeed, industrial part only increased slightly, but in the future, we are confident for its slow recovery in the future. In addition to its price pass-on mechanisms, we also signed supply stability agreement to ensure supply stability in the supply. Say for example, the rural areas in Hebei regions, and also we will be able to drive the sales through different project. As you can see, we have a dramatic increase in commercial connections in the first half. This will also be reflected in the coming future. This is the sales volumes. As you can see, for China Gas, we have been improving our LNG international trading portfolios. We have been increasing our footprint. It means that we will be able to cover the upstream but also the downstreams. We leverage our pipeline networks, also we'll utilize our LNG capabilities to extend into the end market. This will also help us to drive our sales volume. In all these aspect, first, we have our private port of import. We have 7.3 million tons per year of long-term agreement, also we have obtained the right of use of LNG terminals of wet port of Yantai in Penglai in Shandong Province, as well as mid to long-term slots at LNG terminals in Tianjin. We worked with Beijing Gas Group. We signed long-term agreement to lock into the stable slot for LNG. Starting from 2027, we'll be able to use that. That is the arrangement for our port of import. We have growing international trading. We set up a trading house in Singapore for global presence. Also, we have enhanced resources from LTAs and spot market to better allocate our resources. We also worked with Vitol. To diversify our LNG supplies through swap agreement with Vitol to help us to mitigate the fluctuations of supply and price. At the same time, we have expanded into the end terminal sales. We serve nearly 1,000 external C&I users and third-party city gas companies. We also improved our hazardous goods truck fleets to boost efficiencies in transport and trading. This is our effort in LNG ecosystems. Coming up, let's look at connections this year. In the first half, the residential connections were at reductions on a year-on-year basis, dragged by the sluggish property market. As you can see, the connections on the residential side are down by 14%. Cumulative connections, we already have about 48 million. For the industrial side, this is an increase, as we mentioned in the highlight. We have a 10.8% of increase. This is a double-digit increase. In the first half, our new industrial connections is 1,316. The cumulative connection, 25.8 thousand. Also commercial side, you can see that is up by 63.4%. We have 24,906 new connections. This is the categories of new connections. Coming up, let's talk about the connection fee. This has been flat and stable. For city gas users, it's a reduction of 0.8% to HKD 2,490. For townships part is an increase of 0.7%, HKD 2,920. For connectable residential users, we have 54.6 million. In terms of penetrations, we have a 2.3 percentage point increase to 72.2%. In terms of mix, this is flat compared to last year. This is our connections performance. Let's talk about the outlook. How about the outlook for connections? Let's break that down in three perspectives. First, residential. We'll continues to utilize the national policies on the renovation of old neighborhood and city upgrade, so that we can continue to use our existing coverage to enhance penetrations. Also we'll advocate for more policies to renovate old existing neighborhood, and we are trying our best to gain funding support. We have done the statistics. The policies, including the renovations of all existing buildings and the bottled to piped gas and others, we can say that we already have 1.7 million to 1.8 million potential connectable users in the residential side. Now we have 300,000 from the existing buildings. In this context, we will say this 1.8 connectable potentials will be able to set a good foundation for our future stable growth in the coming years in the residential side. This is our strategy in the residential side. In terms of industrial segment, as we mentioned before, first, we will be innovative in our key account management model. We will take the gas supply of our users, especially the users, the key account with more than 500,000 tons a year. We will further unleash their gas demand from such users. The leveraging on the opportunities in the industrial transfer based on our partnerships with governments and industrial groups. Leveraging on opportunities for them to attract more businesses, we will unleash the demand growth from industrial users and for commercial users, we will mainly leverage on the bottled to piped gas conversion to drive up the demand from commercial users based on the conversion of bottled gas to piped gas. In the context of the ever-increasing demand on safety of governments, bottled gas are outperformed by piped gas in safety. Governments are all pushing forward the bottled to piped gas conversion. Leveraging on this policy, we are growing our commercial user base. Based on our calculation, the bottled to piped gas user in our concession registration, there are about 150,000 users. For the entire year, there will be about 10,000 users. That is how we are leveraging on our policy. We are also growing our user base based on the market-based business development, especially on the small to middle commercial users to pave a better ground for our demand and consumption growth. This is the key driver for our connection growth. Moving on to LPG. LPG this year, this revenue went up by 1.9% year-on-year to break it into two parts. Retail Went down by 11% from 0.4 to 0.636 million tons. Wholesale went up by 5.2%. Revenue went up from HKD 8.4 billion to HKD 9.6 billion. Operating profit went down for the first half of this financial year. Operating profit was merely HKD 2 million compared with HKD 194 million of last year. There have been two causes. First of all, is the supply-demand changes, and second is the geopolitics in the Middle East. The international LPG price is sitting high, which made the procurement price of LPG from the international market really high. The sluggish demand from chemical businesses is also another driver. In the market of utilizing LPG as a raw material is witnessing sufficient supply. Based on all of these factors, the retail price for the market with LPG as raw material went down, which caused the shrinking demand as well as DM in this regard. Also witnessing that despite the decline of LPG volume, DM went up from HKD 1,223 to HKD 1,245 per ton. This is what got us here in this regard. Moving on. Going forward, in terms of LPG based on China going big into provision, we will push forward the asset light consolidation of the retail market as there are a slew of businesses of LPG retail in China, hence the opportunities for asset light consolidation. For us, based on asset light consolidation, we will expand rapidly, hence the hands-on returns. For the first half of the financial year, we cover around 30 cities. We launched projects which recorded sales of 0.1 million tons, taking around 30% of the retail volume. That is a volume for within 2 years. With the progressing of consolidation, this will offset the shrinking demand from the existing market so that we can drive up the demand. That is the efforts in this respect. The retail consolidation is based on our brainpower and our track record of operations. We will also elevate the industry's safety systems to push this forward, including partnerships with the small businesses of LPG in local areas of China and station management, filling management, cylinder management, and user service management. We are delivering such management in a unified manner. We are also going digital in such management. We are also introducing intelligent terminal here to boost the intrinsic safety of LPG. The retail consolidation can also drive up demand growth from trading, especially for the 10 premises in South China where we have laid out our major centers. This is another driver for growth. That will wrap up our efforts in asset light consolidation. The future will witness how such efforts will pay off. Moving on to VAS. Our business positioning as a household goods and service provider, evolving to China's household name in services, serving all scenarios of life in our business model, growth based in new retail operating in the private domain, store-backed and household-oriented. For the first half of this financial year, revenue of VAS went up by 11.6% from HKD 1.8 billion to HKD 2 billion. Operating profit up from HKD 0.87 billion to HKD 1 billion. That is the key financials of VAS. Product portfolio, we have three categories of traditional offerings and four of emerging ones. The traditional three, we have kitchen appliances, gas safety products, and other products and services. In emerging four, home appliances and et cetera. The growth of the first half was basically from retail and by iterating our product portfolio. As we have mentioned, we are evolving from the provider of kitchen products to household products. We are boosting our competitiveness in our flagship offerings. We are also developing emerging offerings, including residential hardware solution and et cetera. This is how we are tapping on the potential of user-based growth and driving up our quality of services. On the back of our user base of City Gas, we can ensure stable cost of user acquisition of our end operations. This is our basic gameplay in this business. In terms of policy, in July, NDRC and Ministry of Finance also issued a notice on several measures for providing greater support for large-scale equipment renewal and consumer goods trade-ins, which is summarized as the Two New. We have expanded the coverage and witnessed more flexibility in such policies. Around CNY 300 billion have been provided to support equipment upgrades and consumer goods trade-ins. In this regard, China Gas's VAS arm is also taking a active part in it. For the subsidy, the home appliance subsidy is up to CNY 2,000 per item, and home upgrades subsidy of up to CNY 30,000 each. We will well utilize such opportunity to drive up our VAS. Next, integrated energy. To brief you on this, there are three parts in our integrated energy business. First of all, PV power generation and energy storage, green electricity, and integrated energy efficiency. The energy storage is the user site energy storage in China. We have signed on around 213 MWh energy storage and adjustable electricity volume totaled 104 million kWh per year. In the industry, China Gas is absolutely a top player in this business. For our PV projects, the first half of the financial year witnessed 43.4 MW of launched and installed PV projects. Green electricity witnessed our efforts in the transaction of Green Certificates, green electricity, and et cetera. Electricity sales total 2.8 million MWh. Power distribution total 27.4 million kWh, up 31% year-on-year. Sales of green electricity and Green Certificate total 8,200 MWh. Energy supply in our integrated energy total 565,000 GJ. Here, the flagship offering is the low carbon efficient machine rooms featuring units of cooling, heating integrated, integration, which also boosts auto energy efficiency analysis of running systems. This part of business witnessed 0.55 million sq m contracted. We are providing green and low carbon energy services for hospitals and public buildings and et cetera. We are also offering biomass and other renewables to provide energy solutions reliable. For the four launched projects of the first half of the financial year, a total 0.57 million steam tons per year. That will wrap up our efforts in integrated energy. Now moving on to stimulus policies, I will now go deep here, as all of us are aware with the updates. In September, China has issued a slew of stimulus policies, including those by PBOC, MOF, NDRC, and MOHURD on, for example, removal of caps on home purchases and et cetera, and including the NDRC's policies on implementing the press policies of China Gas, as well as policies on ease of doing business to protect legitimate rights and interests of small and micro businesses. We're also expecting such policies to drive China Gas' operations in at least six parts. First of all, lower interest rates. PBOC, China Central Bank, has issued we will cut interest rates of China, which mean lower interest rates for the financing of businesses, which can meet the demand of financing for businesses. Actually, for this year, financing costs went down by 1.1% this year. Another driver is the house and fortifying policies. This will stabilize our connections as well as the collection of payment collectible. Policies on tackling debt will also provide a rosier picture for our collection of accounts receivable. Cost reviews and other policies will also unleash more potential in our profitability. The growth in the macroeconomy will also provide a more fertile ground for our energy demand. The trading policies will also boost our VAS. At least in the six parts, China Gas will benefit from such policies. Now, the key financials. First of all, consolidated income statement. As you can see here, our revenue, HKD 35 billion, down 2.6%. Sales of natural gas, HKD 19.6 billion, down 9.6%, mainly due to the wholesale and trading factors as we already covered that, for city gas. The selling price actually went up slightly, yet for the retail, for wholesale and trading, the price went down, hence the slight in our revenue, which can explain the 9.6% slight here. Gas connections went down by 12.2%, sitting at HKD 2.0 billion. As the volume of connections went down, it can explain the decline. Engineering, design and construction went down by 23.9%, sitting at HKD 1.3 billion. This is also benefiting from the policies issued by China, including the ultra-long special treasury bonds, which push forward the renovation of old neighborhoods. So part of the projects was done by our engineering companies and our design institutes. Let's talk about LPG. As we mentioned before, I will not go into the details. This is the revenue breakdown among different segment. Gross profit compared to last year, we have an annual increase of 2.3% to HKD 5.969 billion. For profit for the year, it's an increase of 7.4% to HKD 2.3 billion. After deducting the income tax, it is HKD 1.76 billion. Earnings per share, it is HKD 0.327. We propose an interim DPS of HKD 0.15. This is our P&L. Coming up, I believe after reviewing the financials, I believe you might have some questions in relation to some of the changing variations, so I would like to elaborate on some key data. First you can see, the interim this year compared to last year, you can see that we have revenue from joint ventures is reduction of HKD 540 million. Last year, it is HKD 230 million, this year is negative of HKD 310 million. For several reasons, we have seven coal-to-gas companies in Hebei, Tianjin, Shanxi provinces, mainly in North China. These seven projects has given us some fluctuations due to the government subsidies. Government subsidy has about RMB 400 million. Last year, we signed agreement with the government for subsidies. In the last two announcements, we have already disclosed that. Last year, when we signed the agreement to determine our supply, meaning that, before this financial year till 2023, before the March of 2023, we had agreement. We have receivables from the governments. Those subsidies that we need to collect are not received now. According to this supply stability agreement, we have confirmed this HKD 400 million. In the first half of this year, we are still not in the heating season yet this year. The confirmations of the last agreement covers HKD 400 million. However, in this reporting period, we have such a gap. That is why our revenue from the joint ventures is down. Also, for example, Liuzhou, Fujian, Anlan, those JVs and associates also have lower gas sales volume, so that also negatively affect our performance from JVs and associates. Of course, I believe you are interested in the full year. First, the coal-to-gas project in Hebei is the same as last year. We will signed agreement for supply with the government. That will also covered for the full financial years. According to the agreement, we expect that for the whole group, meaning that taking all the companies both on-book or off-book all together for the full year. Then we compared with the last financial year. We expect we will have HKD 100 million more this year, meaning that we expect HKD 1.8 billion this year compared to the HKD 1.7 billion last year. For the 7 GCE coal-to-gas company, for the full year, we will have HKD 1.3 billion. In the second half, we will have the subsidy of HKD 1.3 billion from the government. That is how we expect for the full year. In this context, we expect in the second half, our revenue from the JV and associate will touch the bottom and go up because first we will have the subsidy from the government and second, the improvement of gas sales. That is why for the full year we expect that the benefit will be reflected in the financials in the second half due to the reasons that I mentioned. Of course, for this large JVs and associates in the first half, they have reducing connections. Of course, in the second half we expect the gas sales and also with the price pass-through mechanisms will help us to boost the performance for the full year and the second half as well. In the interim, in the first half we have a negative HKD 310 million from JVs and associate. Last year we have a positive HKD 398 million. For the full year we still expect that we can be flat with last year. That is the elaborations. First important element, as we mentioned, the subsidy. According to the supply stability agreement with the government, the total volume, the total number is the same. However, it is just because last year we booked in the first half, but this year we'll book it in the second half. Second, I believe you're concerned about tax as well, income tax. First, the taxable profits has increased. Has increased, as you can see. In the last year our interim is HKD 2.68 billion, but this year is HKD 2.98 billion, that is a HKD 300 million of increase. Due to our revenue and profit from our JVs, we can see that the profit has increased. That will also result in the increase of corporate income tax. The third element, in terms of the tax rebate from last year. We have provisions of tax before and by December 31, 2023 we had the rebate of HKD 135 million. During the tax, income tax settlement we get the refund which offset the tax of the interim last year. This is not fully comparable. We don't have such an element. We don't have such a refund this year. That is why in terms of tax, in terms of corporate income tax, we have a significant increase. You can see, as we mentioned, financial cost has come down by HKD 160 million and interest expense is down by HKD 270 million. The blended financing cost in terms of percentage down to 3.8% from 4.97%. This is the elaboration on P&L. Okay, let's come to balance sheet. Total asset as of December, as of the 30th of September is HKD 153.5 billion. Total equity HKD 64.2 billion. Cash is an increase of HKD 1.1 billion compared to March. Short-term bank loans reduced but long-term bank loans increased. Our interest-bearing loan liabilities has increased and if we deduct, if we exclude LPG trade finance related facilities, we have a slight reduction compared to the end of March. Net gearing ratio 78%. Let's come to cash flow. Our net cash from operating business is HKD 3.7 billion. Net cash from investing activities is negative HKD 1.5 billion. That's give us a free cash flow of HKD 2.22 billion. As you can see, our cash is still positive, healthy, in a healthy profile. Lastly, we would like to talk about the guidance for the year of the financial year 2024 to 2025. We expect the dollar margin of the year for the full year will be CNY 0.53 per cubic meters. As we mentioned, for the first half it was CNY 0.59. In the second half last year we have CNY 0.46 of dollar margin. That said, our dollar margin will be an increase of CNY 0.03 compared to the same period for the second half. We expect sales volume growth will be 2%, mainly driven by residential and commercial sales. In terms of new connections, we mentioned in the presentation of connections, we expect the new connection growth in the first half will give us the sales growth in the second half. However, we are cautiously optimistic about our industrial segment. For residential, commercial and industrial segments, they present different contributions for the company. We expect a slight growth of 2% for the company in terms of sales volume. For new residential connections, we maintain the same guidance of 1.2 trillion-1.4 trillion. Growth in gross profit or operating profit of VAS is 10%. CapEx, we expect HKD 3 billion-HKD 3.5 billion of CapEx. Among that, city and township gas is HKD 2.5 billion-HKD 3 billion. Other businesses, HKD 500 million. Last year, for the full year, we have a CapEx of HKD 7 billion. This is already a very big reductions in CapEx compared to last year. For the free cash flow this year, we will have about HKD 3 billion for the full year. This is the cash flow. This is all our basic guidance, and this concludes my presentations of the business update. If you have further questions, we are open to you. Thank you very much.