Earnings Call: H2 2019

Jun 21, 2019

Dear investors, welcome to the annual results announcement for 2018-2019 fiscal year of China Gas. First of all, let me introduce the managing board. They are Mr. Liu Minghui, Executive Chairman, Managing Director, and President. Mr. Huang Yong, Executive President. Mr. Zhu Weiwei, Executive Director, and Vice President. Mr. Jiang Xinhao, Non-Executive Director. Mr. Frank Li, Assistant to the President. Now, Mr. Liu Minghui will give some opening remarks. You have the floor, Mr. Liu. Thank you for coming to the announcement conference today. I heard that it is very hot outside, and we have experienced some traffic jams. Thank you for coming against all odds. On behalf of all the Directors and shareholders of the company, and on behalf of the 60,000 employees, thank you for your attention and support. We have this kind of conference every year. It is the time for us to give results. We are very worried because sometimes when we do not do well, we will give unsatisfying results to the investors. We will present our results anyway. Very shortly, I will present the results to you, and I hope that you can acknowledge our work, and I hope you can sincerely ask some questions and give us your feedback. Now, Mr. Zhu Weiwei will give the presentation on the performance of the last fiscal year and outlooks for the future. Mr. Zhu, please. Today is the day when we have the longest daytime in a year. Thank you for coming against all the difficult situation. Now, on behalf of the company, I will do a presentation of our performance. We have three parts in the presentation: operational performance, fiscal performance, and future strategy and outlook. First part is about natural gas. As you can see, in six provinces and autonomous regions, we have acquired 15 additional city concessions. As of March 31, 2019, the group secured a total of 542 pipe gas projects, including 365 city pipe gas projects, 177 township replacement of coal to gas projects. These 365 projects are located in Heilongjiang, Inner Mongolia, Hunan, Jiangxi, Jilin, and Hubei. Heilongjiang and Inner Mongolia autonomous region have the most of the projects. Apart from new city projects, we have also increased the investment in the shares of our existing projects. For example, in Hohhot, we increased the share from 51% to 63%, so the project has now become one of the subsidiaries. In Shenyang, this is the last big city gas project we acquired. Our shares have increased from 25% to 46.4%. We signed a strategic cooperation management agreement with Shenyang government in the development and exploitation of natural gas in the city. These are our natural gas projects in China. We have natural gas projects in all the provinces except Qinghai and Tibet. Gas volume. In 2018-2019 fiscal year, the sales of our natural gas is 24.5 billion, 31% increase. We have 114.4 billion cubic meter of city gas projects. Pipelines and trade, nearly 10 billion cubic meter, up 44%. Pipelines and trade account for 40%, city gas projects, 60%. As for customer breakdown, we have four different categories of customers. First of all, residential customers. Residential customers make up 27%. The volume growth is 29%. We have coal to gas projects in countryside. In the last fiscal year, countryside projects saw 700 million of cubic meter of gas, including 605 million of pipe gas. The dollar margin is around $0.40. If we exclude the countryside projects, the pure city project growth is around 19%. Industrial customers make up 47.8%, up by 30.1%. Commercial customers make up 17.1%, up 22.5%. CNG and LNG stations account for 8.1%, down 2.5%. We know there has been little growth in the natural gas stations growth. We streamlined some natural gas stations and shut down those inefficient gas stations. That is why there is little growth in this regard. Gas connections. We saw very significant growth in the connections. Last year, we completed connections for 5 million households, up by 30.1%. Existing customers account for 36%. If we break down the number 5 million, it is higher than our guideline, which is 4.7 million. City connections have been at the same level as last year, 2.46 million, down by 2.2%. Countryside projects, 2.46 million customers, up by 108.1%, 20% more than what we expected. This is for residential customers. When it comes to industrial customers, we saw around 16% of growth. We connected to 2,686 industry customers. It was for the first time that we exceed 30,000. As for commercial customers, up by 14.3% year-on-year, while CNG and LNG stations come down to 575 stations. This is the situation for this year. We envisage with the National VI standard for heavy trucks and with the LNG for vessels, including inland river vessels, have seen new policies. China Gas as a group will focus on North China, Northwest China in building its LNG networks. We expect that in this fiscal year, we will increase the number of LNG stations, so the downward growth is just for present. This is something that you have been following very closely, and that is tariff and dollar margin. As you can see, we have four categories of customers, all of which have seen very good growth. As for dollar margins, they are in line with our medium guideline, $0.61. Very stable, but there is some dynamic change in structure. Residential is down to $0.44. Industrial sees no change. Commercial sees a reduction to $0.75, while CNG and LNG stations have seen an increase to $0.91. So the dollar margin for the whole year is $0.61, totally in line with our expectation and the guidance to investors. To let you know, now we have the price increase in winter as well as in summer, but their impact on dollar margin is as follows. With the combination of residential and non-residential customers, we have seen a growth of $0.26. If we look at the whole group, the growth is $0.10. 80% has been absorbed by the end of 2018. Those that are not absorbed will be restarted after April. As for residential customers, those that are not absorbed or not absorbed in time, they are working with local governments. And the governments have given subsidy to offset the time lag and its influence. Because of winter price hike, we see a 20% growth per cubic meter. If we are looking at non-residential customers, the price increase is $0.46. As for summer price hike, overall, the impact is less than 10%. 80%-85% of them are from piped gas. The increase is 6.4%. As for non-piped gas, the increase is over 20%. Price hike in summer is different from that in winter. In summer, the price hike is just coming back from a high price in winter to a reasonable level in summer. We do not need to offset the impact, but to absorb the difference directly. There is no delay in the influence on price. We believe dollar margin will remain $0.60 and there will be further room for growth. To give you some numbers, 29 cities in China have rolled out new policies on the regulation of gas distribution. 78 projects have received the approved price for gas distribution. For non-residential customers, the dollar margin is $0.80-$0.90, while $0.60 for residential customers. The situation actually works good for us, and we will envisage some further room for price hike. As you can see, the price system has been in dynamics. We have price hike in both winter and summer. But for us, we will absorb these new changes in the future tariffs reasonably. This is for dollar margin. On top of that, we may look at connection fees. They are rather stable in both cities and countryside. As for city projects, it is 2,508. As for township projects, 3,010. But they are in line with our range in the guidelines. I believe in 2018-2019 fiscal year, connection fees have attracted a lot of attention. This is the first time for us to report the number in Chongqing, and the figure is 3,000. Guangxi has remained the level of 2018, while Yunnan sees 10% increase of cost. In Guizhou, it is 800 in Guiyang, but in Shaanxi, RMB3,000 is too high, so we need to monitor the risk and costs. There is no province which sees price decrease. Second, our central government will not take a one-size-fit-all approach. It is not the policy of NDRC. Rather than that, different provinces will adopt different prices. This will be the new normal in the future, which is also in line with our expectation. The average connection fee is 2,500, which is in the lower range. Connection fees contributed to 34% of our profit before tax. If we exclude rural projects, it would be 18% only. In the future, we will see more coal to gas projects in countryside, while the proportion of city projects will slow down. So our percentage next year would be lower than other companies. If you look at 10%, which is the cost utilization rate, why is that? China Gas will make use of its subsidiaries, its design institute, its suppliers, logistic companies. In the future, as you can see, at present, when it comes to connections, our profit margin is over 30%. Probably you will see it as a risk. However, after EPC engineering is completed, the price we offer to project companies will reflect the market supply in cities. Based on that, the EPC projects in countryside, after measure is taken, will see only a profit margin of less than 10%. In the future, city gas projects will continue to choose the same model. We can see in the future, the profit margin in connection fees will further go down. Engineering, design, and services will see an increase in profit. In the midterm, we will explain that in the results announcement meetings. We cover over 132 million of people with a 60.7% penetration rate, which was 57.2% last year. Liquefied petroleum gas, LPG. We are the largest vertical integration supplier. This year, we sold the same amount of gas as last year, 4 million cubic meter. Trade sees 2.78 million ton, down by 5.4%. As for sales, it is increasing and our income is as same as last year. Our core profit sees a decrease of 1.5%, while operating profits is a reduction of 2.8%. The reason is that wholesale volume of LPG sees some reduction. In last fiscal year, LPG prices and crude oil prices have seen very big fluctuation. Let me look back on 2018, where there was a decrease in oil prices. Brent oil decreased to $52. As we can give you the price of ethylene, CP price has decreased to $430 per ton. Our customer price has decreased, but we have inventory. After we purchased some gas, it takes some time to sell the gas after they arrived on terminal. If there is significant price decrease, it will not be translated to the price difference in gas. In Q1 and Q2 this year, the price have rebounded. It was mainly because of the fourth quarter, which saw much fluctuation. This year, our dollar margin per ton, compared with 2017, 2018, sees a lot of difference. This year in April and May, the dollar margin per ton rebounded to 396 yuan, so there is much fluctuation. With that in our mind to control risks, we will control it to a certain level in our profit contribution. We decreased the import of LPG. That is why you can see the wholesale volume for LPG has gone down, but we are very confident for the future development of LPG despite the difficult situation. These are our LPG projects in China. Value-added services are light asset services. We have 35 million customers. Our value-added services include gas heaters, gas insurance, water purifier, air purifier, gas alarm system, bottled water, gas corrugated pipes, maintenance and conversion services, et cetera. We are still expanding our pipeline. They have worked very well in the fiscal year. They have surpassed our guideline by a big margin. Our revenue is up 32.5%, gross profit up 42%. GP margin is 2.4% more than last year. Operating profit The difference from last year is 47.8%, and the number is HKD 1.144 billion. OP margin 29.3%, 3% increase from 26% of last year. This is our business performance. In the future, we will make use of the added volume and existing volume to develop our value-added services. Because of the fast growth of value-added services, value-added services will see increasing proportion in operating profit from 9.4% to 11.4%. LPG is down to earning 1.2%. Income statement. Revenue HKD 59.3 billion. Gas sales HKD 27 billion. Connection sales HKD 11 billion. LPG HKD 15.9 billion. Construction design and services HKD 1.28 billion. Why is it having a difference of -46.2% compared with last year? If you look at the breakdown, there is an offsetting factor. Most of the services are inside the group, so there is an offsetting factor. After the offsetting factor, we have sacrificed some operating income. The gross profit is at HKD 14.059 billion. EBIT, earnings before interest and tax, is HKD 11.6 billion, up by 20.3%. If we exclude one-off or non-operational items, it would be HKD 73 million. There is an exchange loss of HKD 150 million. Hohhot China Gas has been changed from a JV to our subsidiary. There is some revenue. We are talking about HKD 445 million in total. Another listed company that we held has seen some one-off factors, exchange gains and losses, some one-off expenses related to share options. If we take that into account, that would be HKD 150 million. Our share option scheme will see a cost of HKD 63 million. Altogether, we will see a core profit of HKD 373 million. EPS is $1.63, up 32.5%. Profit attributable. Our dividend is HKD 0.44, up 25.7%. We give HKD 0.08 for half year, and our year-end dividend is higher than last year. Our dividend payout ratio is up from 27.3% to 28%. As you see, RMB exchange rate against dollar is down 6.3% in the timeframe. If we take that into account, our profit attributable to owners of the company will see a growth of higher than 28%. Balance sheet. We have total assets of HKD 110 billion. Total equity, HKD 40 billion. Shareholders' equity, HKD 35 billion. Cash, HKD 13.4 billion. Short-term bank loans, HKD 16.4 billion. Long-term bank loans, HKD 21.4 billion. We have around HKD 2.2 billion of financing for LPG. We exclude financing for LPG as usual. Last year it was 62%, and now it is 54%. As you know, in March 2019, we exercised our share option scheme and we spent HKD 3.4 billion. HKD 1.7 billion should be paid to employees, but it was not paid in March because we are talking about the personal income tax and the transfer of overseas funds. At that time, the HKD 1.7 billion of funds were on our account. If we take that into account, our Gearing ratio is around 58%. Our effective tax rate is 20%, down by 2%. Our overall financing cost, 4.64% compared with 4% last year. We mainly finance domestically, so we see a growth in overall cost last year because of Q2, Q3, and Q4, which saw growth. When you are looking at the balance sheet, you will see some payables and receivables, some rather significant numbers. Let me explain. These receivables, which of them are connected to coal to gas projects? How many of the payable items are related to coal to gas projects? Because of the change under IFRS 15, this year, we see two different items, contractual assets and liabilities. It will replace the old financial reporting standards. The payables will be relisted on the contractual profits or liabilities. If we look at the trade receivables, many of the items are deposits or things alike. This should be excluded. Contractual assets and receivables are around HKD 110 billion. That is the amount up to 31st of March. Coal to gas, HKD 4.76 billion, around 43%. If we take them all together, it would be around HKD 6 billion. HKD 1.5 billion is related to coal to gas projects, 21.6%. As I said, as for connection customers, there is little growth in city gas projects. The main growth is from coal to gas projects. There is an increase in the proportion of coal to gas projects. These are for contractual assets and receivables. For payables, we have trade payables. You may read the items in appendixes. The real payables are HKD 17.8 billion. Coal to gas, HKD 8.4 billion. Last year, it was HKD 1.69 billion. Another item is receivables from joint ventures. It is HKD 7.35 billion. How do we arrive at the number? HKD 7 billion out of HKD 7.3 billion was from the joint venture. In Tianjin, Langfang, Baoding, and Cangzhou, we had coal to gas projects, and we worked with a joint venture for that. This is where the HKD 7 billion came from. We are talking about the design institutes, supply chain companies. We have signed a contract of HKD 11 billion. HKD 4 billion was paid. HKD 7 billion has not been paid. Why is it increasing? Around HKD 1.5 billion was because of the high pressure pipelines around Tianjin City. We are talking about the peripheral districts in Tianjin, and there is tremendous potential for industrial and commercial gas customers. In the future, in these four districts, we are talking about 2 billion of gas sales. We are building around 400 kilometers of high pressure gas pipelines around Tianjin. There is an additional CapEx, and this was done by our engineering company. If we exclude HKD 1.5 billion, we still have HKD 5.5 billion. They have cash on hand, and they have subsidies from the government, and they have gas sales net proceeds. The joint venture will pay back our subsidiaries. This is how I can explain on the receivables and payables. Let's then look at the profit margins. OP margin is up from 15% to 16.9%. Sales of gas dollar margin remains stable, $0.61. Profit margin for gas sales is up around 1%, very stable. Gas connection sees slight decrease. Construction, design, and services have maintained the level of last year. LPG sales, I've talked about that. Value-added services is up 3%. GP margin is up to 23.7%. LPG sales account for 27%, no increase. High profit margin business increased a lot. The increase is mainly from value-added services, which boosted the growth of OP margin. These are the core EPS and DPS. In the third part, I will talk about the future outlook. There's little change in our strategy. We will add 10-20 new city concessions projects each year. Most of them will be in North China. We will look into possibilities of new city concessions. Second, we will speed up connections to old and existing residential buildings to increase penetration rate. Third, we will strongly boost the coal to gas customers. 70% of the new commercial and industrial users are from coal to gas products. Only 30% of the commercial and industrial users are from the existing customers. We will make good use of the favorable environment-friendly policies to boost the growth of coal to gas products from industrial and commercial users. Our natural gas sales, we separate them into two parts based on the Yangtze River. If we take piped gas aside, if we only look at city projects, 70% of them are from the parts at the northern side of Yangtze River. As for pipelines, 27% of the customers are from south side of Yangtze River. You can see a clear difference. Our coal to gas projects will focus on North China, and we will continue to move forward with coal to gas projects. As for North China, we are talking about replacement of coal with gas. We signed strategic cooperation agreement with 15 provinces in Northern China. In over 170 counties and regions, we started replacement of coal with gas. We are talking about distributed energy, natural gas for vehicles, et cetera. By the end of March this year, we have 7 million customers of coal with gas replacement. We will continue to do that in this fiscal year. We should say that with two years of efforts, we have built strong advantage in replacing coal with gas. We have completed a large portion of the national plan. We will make use of the advantage, and we will make use of the national policy. As you know, in 2019, the projects will be completed in Tianjin, and in 2020, it will be completed in Hebei. We will continue with the help of national policies in Hebei, Shandong, and other regions, and Shaanxi Province, strengthen our efforts in moving forward with replacing coal to gas business. The fifth part of our strategy is about value-added services. In the past year, value-added services are a big contributor. We are talking about 5 million customers for each year. The penetration rate has been on the rise. We have 5 million customers. The highest penetration rate is less than 20% in all categories of gas product, so we still have a lot of room for growth. We are building the new retail platform. We are talking about grid management. It is customer-centered. We will make use of the new retail platform, so we can offer good products and services to household customers. We are also making use of big data and AI in customer profiling. Offline, we will meet our customer needs with grid management. We are also building the sharing platform with the employees, so the employees will become the partners of the value-added services. We are also working with other internet platforms in integrating these platforms so they can work together hand in hand. I believe we will see a faster growth of value-added services with these measures. When it comes to LPG, although the performance in 2018 and 2019 was not satisfactory, it is just for the moment. We believe LPG, when it comes to the integration of trades and capturing the opportunity of increase of customers, will have great potential. We are exploring new technologies in LPG. Therefore, in Southern China, we can build microgrids of LPG gas. So LPG will be converted to piped gas. We will envisage a lot of opportunities, and this will increase our utilization rate of gas assets. In the end, distributed gas, cogeneration, electricity sales. We have 68 distributed energy projects. Last year, we sold 1 billion kilowatt, with net profit of 40 million. This fiscal year, we are looking at 1.2 billion of electricity sales and around 200 million of gas. The net profit will be rising to 120 million. In the future, by 2023, we will see over 100 overall energy projects. By that time, the gas sales will be 5 billion cubic meter. We will service around 100 million of square meters in heat supply. This is about overall energy business. In the end, guidelines and CapEx. On the left side, you have our situation in the past fiscal year. We have some difference in meeting the expectation in LPG, but it is less than 5% in our business, earning 1.2%. Apart from that, we have completed nearly all the items on the guidelines. City gas projects have exceeded our expectation, and that is also the case for connections. Value-added services. Gross margin is 42%, higher than 40%, which is the guideline. In the future, as we do in the coming years, when it comes to city gas projects, in the volume growth and connection growth, we will still be looking at 25% of growth in city gas projects. As for connection, we are looking at 6.3 million households in the next fiscal year. We will not see any change in city gas projects, 2.7 million, and we will have some new customers from coal to gas projects. LPG sales, we have lowered our guideline for this fiscal year, 4.3 million, but next year the growth will rebound. These are our guidelines. As for value-added services, we still maintain our target. That is over 40% of growth in gross margin. CapEx. In the coming years, the CapEx will be around HKD 10 billion, including HKD 3.5 billion for city projects and HKD 4.5 billion for countryside projects. As for countryside, you will ask why the CapEx will not see much increase. I should say, with the development in recent years, we have built our base in coal to gas, and we have learnt some lessons in controlling cost. For example, we have 10% of decrease in both the engineering cost and material cost. Because of the existing facilities, for example, in Tianjin, if we have new customers, the cost per customer will be decreased. We have been very efficient in operation. So with same amount of capital expense, we will cover more customers. That's why we will not see significant CapEx growth in countryside projects. LPG cogeneration, we're talking about HKD 1 billion to HKD 1.5 billion. Storage facilities, HKD 500 million. That's how we arrived at HKD 10 billion, the number. Also, today we have refreshed the scheme mandate limit of our share option scheme. This is linked to future profits. Last year, we issued a circular. This year, we had recorded a profit of HKD 8.2 billion. That's why we have raised the limit for share option scheme. By 31st of March 2022, we will have to realize profit attributed to shareholders of HKD 14 billion. If that's not possible, we can complete the project by 31st of March 2023, but the target will be upgraded to HKD 15 billion. This is for the share option scheme. That's the end of my presentation. I will be glad to answer any questions you have. Mr. Liu can also answer the question. Thank you for your attention.