Earnings Call: H1 2020

Nov 25, 2019

Dear investors, good evening. Welcome to the interim results announcement conference of China Gas. We have Mr. Liu Minghui, Chairman Executive Director, Mr. Huang Yong, Executive Director and Executive President, Mr. Zhu Weiwei, Vice Executive President, Mr. Jiang Xinhao, Non-Executive Director, Mr. Frank Li, the Assistant to the President. Mr. Liu, the Chairman, will give some opening remarks. Dear investors, dear friends, dear analysts, and to any of you who have been following China Gas, today, we are going to present our results of the past fiscal year. In the first half of the fiscal year, we worked together against all odds and difficulties, and our company has achieved stable and continuous growth. We achieved good performance, and we were able to return to our investors with good performance. The Executive Director and Vice President, Mr. Zhu Weiwei, will start with the presentation. Also, in the meantime, on behalf of our board and management, I thank the investors and analysts who have been following and covering us for a long time, for your support. We will return with better performance and make better contribution to the gas industry in China. Thank you, Mr. Liu. Mr. Zhu will now make the presentation. Dear analysts, dear investors, on behalf of our group, I will now report to you the performance of the last six months. My presentation will cover operational performance, financial performance, and future strategy. Let us first of all look at operational performance. As at September 30, 2019, the group cumulatively secured a total of 582 piped gas projects with concession rights compared with 508 of the first half of last fiscal year. There has been remarkable growth. 300 are from city gas projects and 200 from rural areas coal to gas projects. This map shows the holistic view of piped gas projects nationwide. Our piped gas projects are located in all provinces, except Tibet and Qinghai. Natural gas. This is about volume growth. In the first half of the fiscal year, the sales of natural gas has reached 11.8 billion relative to 10.9 billion last year, representing an increase of 7.8%. There are two parts in natural gas sales volume. There is a decrease in pipeline and trade, which is 1.1% decrease. City and township projects have increased very fast at 15.4%. In the volume growth, pipeline and trade have decreased to 41.9%. City and township projects has increased to 58.1%. Now we can look at the customer breakdown. This is on the growth of natural gas sales in city and township gas. Residential, the total volume of residential is 1.6 billion, representing 23.6%, up 18.3%. Industrial, 3.6 billion, accounting for 53.4%, up 18.2%. Commercial accounts for 15.6%, up 14%. CNG and LNG stations account for 7.4%, down 6.1% year-on-year. Total city and township gas volume is 6.87 billion cubic meters. Pipeline or trading is down 1.1%, mainly due to LNG tradings. In the first half, LNG trading was down 300 million. There was a decrease of 4.5 billion. That's the customer breakdown of natural gas. As for connections, residential connections of natural gas have been remarkable as always. If you compare it to last fiscal year, there is an increase of 15.8%. Now it's at 2.93 million, nearly 3 million in the first half. Customer breakdown. As you can see, the number 2.9 million customers represents an increase of 15.8%. The total number of customers have reached 32.61 million customers, representing a growth of 20.3% compared with the last fiscal year. City projects have been connected to 1.716 million customers, up 21.6%. Township projects are 1.217 million customers, up 8.4% relative to 1.12 million customers last year. Why are city projects increasing so fast? The reason is, first of all, last year we acquired new projects, and this year they are contributing to over 100,000 customers. Last fiscal year, we acquired a gas project in Heilongjiang. There are 600,000 existing customers. This year, these acquired projects contributed to our gas volume by 100,000 customers. In Northeast China to receive Russian gas import, we ask city projects in Northeast China to streamline their existing customers because you cannot sell the Russian gas without connections. That is why we have sped up our efforts in develop more existing customers. That is why we have strengthened our effort in many areas, in developing existing customers. That leads to high growth in city gas projects. As for industrial projects, we have connected to 1,431 customers and the total number of industrial customers is 13,000. As for commercial customers, there is a decrease of 8.4%. The total number of commercial customers is 213 customers. CNG and LNG stations. There are 555 CNG and LNG stations. Compared with 575 as of the end of March last year, there is a decrease of 25 stations. As you know, as we reported, there have been difficulties faced by CNG and LNG stations, mainly because of the impact of new energy vehicles. To improve efficiency, we closed down some loss-making stations. That is why we have only 555 now. Tariff and dollar margin of natural gas. In the first half, residential tariff is at RMB 2.6 ex tax, increasing 4.4%. Industrial, RMB 2.61, up 6.1%. Commercial, RMB 2.72, up 5.4%. CNG and LNG stations, RMB 2.97, up 2.1%. Dollar margin has recovered compared with last fiscal year. It is increasing by HKD 0.07. In this year it is RMB 0.51. Industrial customers have seen a decrease of HKD 0.01 from HKD 0.59 to HKD 0.58. Commercial is up to HKD 0.80 from HKD 0.75. LNG stations, HKD 0.89. The consolidated dollar margin has been kept at a stable level. Last fiscal year, HKD 0.61 vis-à-vis 62.5% in the middle of last fiscal year. Why is there a slight decrease? First of all, we have large-sized coal to gas projects. For coal to gas projects, we offer some discounts. The higher dollar margin, CNG, LNG gas, has seen their share decreasing from 9% to 7.4%. We are talking about HKD 0.89 for LNG and CNG stations, but the share of the stations has decreased. That is why the consolidated dollar margin has decreased. Township gas products. Dollar margin was HKD 0.40 last year, but this year it is HKD 0.50 for the first half. However, we are talking about summer, which is not peak season in the first half. It is mainly household gas, which is not of a great amount. So that is why the dollar margin is higher. Now I am going to report to you something of your concern, which was reported by some financial media. It says we have seen great loss in replacement of coal with gas products. It is appalling. But as we explained to some of you, and now we have to emphasize again, the reason for that is, first of all, there are some misunderstandings. The reason is, first of all, national regulations say the city gate prices cannot be raised on the upstream. On the upstream, the rationale is that we do not know if low-price residential gas will be sold to non-residential customers to make more profit. That is why the government will, first of all, charge at the non-residential rate. After the peak season, these fees will be reimbursed if there is an increase of 40% in city gate price. The usual price will be RMB 2.7. Of course, there are some operational costs. That is why there is some loss. In accounting rules, this must be explained with the proper dollar margin. We are actively trying to address the concern. For example, there are some township projects. For example, in Hebei, the policy is if on the upstream, the city gate price does not work, the local government would offer subsidy. For example, in Xingtai City, the government will offer RMB 0.80 subsidy for every cubic meter. The local governments will also actively be cooperating with gas companies in recovering the gas supply at the city gate price. As for operational performance, connection fees have been stable in city projects, RMB 2,500. Terminals, the price is RMB 3,000. We have covered over 350 million in a city population. The connection rate is at 63.3%. Last year, it was 59.8%. As for the connection policies, you may have noticed that recently, Nanjing government revalues down the connection fees for new customers. I believe that is an exceptional case. In Nanjing, new customers may enjoy a discounted price of RMB 2,600. As for existing customers, in a city like Nanjing, there are very few of that. There are very few existing customers. You may have noticed the new policy in Nanjing, but it does not affect China Gas too much. Our peer companies charged a lot higher than we do in Nanjing. That is why the policy has little impact on us. This is something which took place a few days ago. That is why I have to explain. We are very confident for the stable connection fee. Let me turn to LPG, which you know very well. China Gas has integrated all LPG resources vertically. We have 8 LPG receiving terminals and 300,000 cubic meter of LPG storage capacity, 100 LPG distribution projects, and 1,100 retail stores. Our LPG distribution coverage is covering 19 provinces in China. Sales volume has maintained. There is a slight increase. Wholesale is going down by 1.8%, retail is up 5.8%. Sales revenue is RMB 6.51 billion this year relative to RMB 9.81 billion last year, representing an increase of 33.7%. The price is down 34%. The volume has not changed. However, the sales price has decreased a lot. That is why there is a decrease of 34% in sales volume. Gross profit is down 19.5% from RMB 721 million to RMB 581 million this year. This is similar to what happened last year. There is a big fluctuation in crude oil prices. To avert the risk of oil price fluctuation, we controlled the import of LPG. For example, in May, July, September, the decrease of LPG was usually 16% or as much as 19% in only 3 months. For example, in May, the oil price was down from 70 to 50 something. To avert the impact of a fluctuation, we have controlled the import of LPG. Our dollar margin per ton is down 20%. That explains why our gross profit is down 20%. Operating profit was HKD 22 million this year. Last year, it was -HKD 33 million because of high finance costs. Gross margin is 8.9% this year relative to 7.4% last year. Gross margin has improved a little. That's for LPG. Value-added services. Value-added services have fared well in the first half. There is an increase of 118.3% in revenue. Gross profit is increasing from HKD 416 million to HKD 820 million. There is a slight change in GP margin from 41.2% to 37.2%. We've encountered the same thing last year. That was because of structural changes of high profitable projects versus low profit projects. Operating profit before tax is increasing by 98.1% to HKD 676 million. OP margin is similar to that of last year. It's 30.6%. Why are value-added services increasing so fast? That's because we leverage on our huge customer base to develop value-added services with a very good base. We've initiated our new retail platform, and we sell home appliances with our own brand. In September, we had a sales promotion of Smart Home Plus. In a few days, the sales increased to HKD 68 billion. These are the reasons behind the fast growth of value-added services. We will continue to boost further growth in value-added services. Financial performance. If you may turn to the income statement. We are at the second part. Revenue is down 3.3% from HKD 28.8 billion to HKD 27.9 billion. I've explained the reason already. The reason is that LPG and LNG projects have seen less revenue. LPG, as you see, I have explained the number already. It's mainly some structural changes. Gas sales is up 3.7% to HKD 12.4 billion. You may ask, the total sales volume is up 7.8% and there is an increase of 5% in gas price. But why is top-line growth only 3.7%? There are a few reasons. First of all, there is a 3.7% depreciation of RMB. The income in RMB converted to Hong Kong dollar will have big impact. LNG has seen a decrease of 300 million cubic meters, leading to a 7% increase. There are structural changes as well. As we said, in the first half of last year, this year, tradings and the pipe gas are 42% in its share. The average price is relatively low. That's the reason for an unremarkable 3.7% growth in gas sales. Connection fees are up 14% to HKD 6 billion. LPG sales is up 33.7% to HKD 6.5 billion. Value-added services and construction design services have increased from HKD 760 have been revised down from HKD 766 to HKD 734. These services, including the services from the engineering companies and suppliers, are offset. So here we included only the revenue from consolidated accounts. There is an increase of 25.7% in gross profit. EBIT, earnings before interest and tax, is up 25% to HKD 7.33 billion. There are some one-off or non-operational items. Last year, it was HKD 198 billion, and this year is minus HKD 11.9 billion. Profit attributable to owners of the company is up 16.2%. EPS is up 11.4% to HKD 94 billion. If we exclude this one-off items, the core net profit is at HKD 4.921 billion, increasing by 22.2% compared with HKD 4 billion last year, and that's achieved with a depreciation of RMB of 3.7%. If we add 3.7% depreciation back to sales, the core net profit will be more remarkable. EPS core is at 94.31%. The increase is 17.2% excluding one-off facts. Interim dividend per share is at HKD 0.10 vis-a-vis HKD 0.08 last year. What are one-off items? HKD 60 million from exchange rate change. There are other reasons. Sales of assets, acquisition. There are impairments and gains of goodwill. There are exchange rate loss of HKD 9.9 million from the joint ventures. Altogether, the number from one-off items is HKD 12 million. I've talked about changes in exchange rate. Now, let's look at the consolidated balance sheets. Total assets are HKD 111.4 billion. Total equity, HKD 41.7 billion. Shareholders' equity, HKD 37 billion. Cash, HKD 9 billion. Short-term bank and other borrowings, HKD 16.9 billion. Long-term bank and other borrowings, HKD 21.7 billion. Net gearing ratio is 65%. This is excluding the LPG import letter of credit related to trade finance. Compared with 62% in last fiscal year, there has been a slight increase. That's for balance sheet. As you see on the circular we issued today, we've addressed some of your concerns of balance sheet. You may ask about our cash recovery in the city gas projects. In the first half of this fiscal year, there is an increase of cash collected of HKD 2 billion for city gas projects. If we look at the customers connected, the number increased from 930,000 to over 1 million. Our plan is, as for the fiscal year, in the second half, we will add further HKD 3 billion. As for the whole year, we are talking about cash recovery of HKD 5 billion, which equals the previous two years combined. Contracted assets increased from HKD 7 billion to HKD 9 billion. The increased incremental amount is over HKD 2 billion. This year, as we said, there is huge increase in city gas projects, even higher than coal to gas projects. As we explained, even if the customers are connected, we will not receive their cash payment immediately. It takes some time to receive the cash. As for city project, there is an increase of contracted assets of HKD 1.5 billion. City gas projects have contributed with HKD 1 billion. Receivables from joint companies decreased from HKD 7.3 billion to HKD 6.9 billion. That's the joint venture with Zhongbaotou on the coal to gas projects. With the cash payback, the supplies from material and the engineering companies have paid their dues, and they will repay their dues further in the future. As for payables, you may have noticed that there is a decrease. As for payables, by the end of March last year, there was a HKD 1.7 billion of payable as employee options. That means we haven't paid to employees with their option incentives that they're entitled. We haven't paid them in total by the end of March, but this year, we are paying them gradually. The HKD 1.7 billion do not belong to the company, but to the employees. That's why there is a decrease of HKD 1.7 billion. As for LPG and LNG sales, this year, we have controlled the amount of low margin sales. That's why there is less payables. Now it's HKD 600 million. So we are talking about total of HKD 2.3 billion. As for other business, there will be an added HKD 1 billion. If we look at the turnover days of the payable days, it's over 100 days. The peer companies have seen 30-60 days only. That's for consolidated balance sheet. Now, let me look at profit margin. This is the operating profit margin before tax, excluding financial costs. This year, in the first half, we've increased profit margin from 16% to 21.5%. Sales of gas is increasing from 12.5% to 13.9%. Gas connection increased from 29.7% to 37%, quite remarkable. Construction design services increased from 17.6% to 19.3%. You may ask why connections are increasing so fast. The reason is that this year, the group made an effort to reduce cost and improve the efficiency by stringently controlling construction and installation cost in coal to gas projects and installation projects. We have optimized our design. For example, in rural areas, the length of pipes is very much linked to installation cost. We try to optimize it, reducing the length of pipes. We have streamlined our engineering process to decrease subcontracting fees. That leads to much less material cost. However, as you know, in rural areas, our group subcontracted the projects to the engineering companies. The standard doesn't change. That's why we can retain the profit at our project companies. That's why there is a 7.9% increase in connection fees. By the end of this year, the number will further decrease because, as we reported, PMC of city gas projects has been advanced already. We offer PMC prices at a market-based rate. That's why we are expecting a lower margin in gas connections, but higher margin in construction design and services. By the end of next fiscal year, next June, you will see the result. I will skip LPG. I have talked about value-added services already. As for future strategy and outlook, there are not so many changes in this regard. First of all, we will continue to add 10 to 20 new city concessions in each year. This is our strategy over the years. Second, we will speed up connections to existing residential buildings to increase penetration rate. We will further develop coal to gas customers, especially with the import of Russian gas. We will further strengthen our effort in develop coal to gas projects for industry and commercial uses. In North China, winter heating application means a huge potential market for us. We will be committed to this project, and we have the guidance already. Every year, we are adding 5 million or more customers to the existing 38 million customers in the value-added services market. We will leverage on the very best-performing value-added services market to boost the top line and bottom-line growth. We will promote new retail platform, grid management, home services, et cetera. With grid management, we will deploy our employees to do a good job in the offline one-on-one service for pipeline gas customers. We will take a series of measures to boost the income in value-added services. That's for value-added services. As for LPG doesn't contribute a lot at present. Due to the fluctuation in oil prices, the margin from this part will see less contribution, but we will further integrate our industrial chain and integrate different trade services. Internally, we will improve the demand for LPG, which is from deep processing. We will sign more long-term contracts, stabilizing dollar margin, and we will further explore the possibilities in increasing the sales volume of LPG. In the end, we have 76 distributed energy projects and gas heating projects. In 2019, our plan is to generate and sell 2.1 billion kilowatt per hour of electricity and sell 1.9 billion cubic meter of gas. That's for the first half of the fiscal year, and we are in good order in achieving the objective. In the second half, we will advance the projects, including gas heating projects. This is our development strategy, which does not change very much. Coal to gas project. As at September 30, 2019, we signed contracts with 8 million households, including the 4.76 million households for which the connection works have been completed by September 2019. We implemented projects in over 369 existing city gas project. That is for coal to gas projects. In the end, I am going to touch upon our outlook and guidances. Previously, we gave guidance for three years going forward. As for 2019-2020, according to the interim results, the main guidances and indicators have been unchanged. First part is gas volume in city and township project, which is 25%. In the first half, the increase was only 15.4%, but why will we be able to achieve 25% in the whole year? That is because we are expecting 17% plus in the second half. As you know, most of our projects are in North China. 70% of gas volume comes from North China. Next, in the first half, we will have the peak season. In city projects, there is an increase in gas volume of 18%. As for rural areas, as for the whole year, at least we were expecting 1.5 million customers newly connected. As for the whole year, we are talking about 2.93 million customers being newly connected. As for the whole year, we are talking about an increase of 1.2 billion cubic meter. Altogether, 18 from city projects. Altogether, we will have 25% of increase in city and township projects. We will add 5.5 million new customers in connections. You may ask, "Why is the rural project only increasing by 8%?" And if we can achieve the objective of 2.8 million customers. In the first half, the number is remarkable in connected customers in rural areas, but it takes some time to confirm the payment. Very few have been confirmed by the end of September, but we are very confident that we can receive the payment in time, soon in the future. Sales tonnage of LPG, the target is 4.3 million. There were some difficulties in May, July, and September, but we are still confident about achieving the target of 4.3 million. The guidance for gross profit used to be 40%, but looking at what we have achieved in first half, we revised it up to 50% plus, and we are confident for that. Next year, we will maintain 40% for the time being. We will not change it for now. We will see if we will change the target for next fiscal year depending on what we can achieve in the second half. Dollar margin. Looking at what we achieved in the first half, we think with the peak season in the second half. Over the last few months where we had peak shaving and with local governments being very supportive, we think that it does not take long for us to adjust the price, so the impact on dollar margin would be very limited. That is why we revised up dollar margin a little bit. Our original guidance was RMB 0.6, and now it is RMB 0.61. OpEx in the first half. The OpEx was RMB 5.6 billion vis-a-vis RMB 4 billion year-on-year last year. Why was it increasing? The increasing mainly comes from opportunistic acquisitions. In the first half, we acquired new projects which brought to us an increasing OpEx of HKD 1.98 billion vis-a-vis HKD 8 million last year. Most of these projects were from Shenyang City projects with added equity. The equity increased from 25% to 46%. There is an increase in equity of 21%. Last year, we signed the contract with them. In April this year, the cash was paid to equity seller. The added equity in provincial capitals will contribute a lot to our bottom line growth in the future. In the Heilongjiang project, we spent HKD 3.38 billion. We've also acquired other small projects which meant some expenditure. We expect in the second half that there will be less expenditure. We're not spending an additional HKD 2 billion in the second half. That's impossible. With that, we will maintain HKD 9 billion to HKD 10 billion CapEx for the whole year. HKD 5.6 billion minus HKD 2 billion equals HKD 3.6 billion. That's for plants, equipment, et cetera. That's OpEx. That's why for the first half, the OpEx is around HKD 4 billion. Altogether, the OpEx for the whole year will be HKD 9 billion to HKD 10 billion. Free cash flow. We have an opportunistic gain from acquisition. That's why the free cash flow is minus HKD 1.7 billion. If we exclude the acquisition, free cash flow will perform much better than last year. That wraps up my presentation. Now we can turn to questions and answers.