Earnings Call: H1 2019

Nov 27, 2018

Dear investors, good evening. Welcome to the 2018-19 interim results announcement by China Gas. First of all, the management, Mr. Zhou Si, Chairman and Executive Director. Executive and Vice President, Mr. Zhu Weiwei. Executive Director, President, Mr. Liu Ming Hui. Non-Executive Director, Mr. Jiang Xinhao. Assistant to the President and General Manager of Capital Operation Center, Frank Hui. Now, please welcome Mr. Zhou Si to give some opening remarks. Welcome. In the past half year, China Gas has recorded very good performance. In the half year, the international landscape, as well as China's economy, has experienced complicated situations. China Gas has kept strong growth. The main financial indicators will be presented by me and Wei Wei. Thanks to our management and our employees, our efforts, and we have been doing a good job in making use of the environment policies, so we can seize the opportunities in adverse situation. Probably, you don't have the sense in Hong Kong. I just came from Beijing. These days, in Beijing and in Northern China in general, the haze was just rampant. The haze is now in a dark red color, which means serious pollution. I don't know if the weather will turn better tomorrow. It covers a big area this time, and just exactly in this aspect, we have done a lot. Among the gas companies in China, our performance is the best. Our business of coal to gas is most in China, which gives us a very good foundation for the development of next stage. Now, I will give the floor to Mr. Zhu, and he will walk us through the performance of the last half year. Dear analysts, dear investors, welcome to our conference. Thank you for taking time to attend our investor briefings. On behalf of the company, I will now give an overview of our performance indicators, financial performances, and future strategies. My report includes three parts: operation, financial performance, and outlook. First of all, new projects, new investments. In the past half year in Heilongjiang and Inner Mongolia, we have 11 city concessions. As of today, we have increased the total number of piped gas projects to 508. Among them, 147 are county and district level township replacement coal with gas projects. It reflects our performance in these 11 city concession projects. This map shows the locations of our projects. As you have seen, apart from Xizang and Tibet, and Qinghai, we have projects in all these provinces. The total sales volume is 11.099 billion cubic meters, up by 32.9%. As for natural gas, it's 10.9 billion. Among them, 5.07 is from piped gas and 55.9 billion is from township and city projects. Now, let's look at the business in four aspects and their respective gas increase and the proportion of residential users. Residential, 23%, 21% increase. Industrial, 52%, increase in 38.4%. Commercial, 15.9%, up 24.1%. CNG and LNG stations, 9.1%, up by 4.8%. As you can see, thanks to coal to gas products, the industrial customers are increasing the fastest. The proportion of industrial customers has increased from 47% to 52.1%. That means we can see a clear change of the customer structure. Pipelines and trade volume has actually increased by 40%. It doesn't make a big contribution to profit. Let us then look at connections. Connections have increased 18.3% to reach 253 household customers. The existing customers have increased to 36%. Let us then look at the connections in detail. We have 2.53 million customers. City projects, 1.4 million. It's in line with our guideline. Township projects, 1.12 million. It's increasing by 59.1% over last year. As of September 30, we have seen an increase of 18.8% increase of residential customers. City projects is up 12.3%. Township projects is increasing 221.9%. Industrial customers have remained the same with 1,110 customers, and it has increased by 27.2%. Commercial, 15,622 customers, increasing by 6.1%. Portfolio total, 184,000. Totally, we have around 200,000 customers, including industrial commercial, and there is no much change to CNG and LNG stations. Let's then look at our tariff and dollar margin. The average custom tariff, excluding tax, has changed. Residential, 2.49. Industrial, 2.46. Commercial, 2.58. CNG, LNG, 2.91. As for dollar margin, in the overall dollar margin for city gas projects, which is HKD 0.625, compared with HKD 0.623 in the last fiscal year, vis-a-vis HKD 0.651 before the last financial year. There was a bit decrease, and this was mainly due to the combination of non-residential and residential projects. You can see a HKD 0.20 to HKD 0.30 increase, and the average is HKD 0.26. On average, we're talking about a HKD 0.10 increase. As of the end of September, the impact on dollar margin is only HKD 0.02. But the current situation is that 85% of the projects have fixed the price, except for Shanghai, Liaoning, Xizang, and Qinghai. We expect that the work of fixing the price will be finished by the end of this year. As for its impact on the fiscal year, the impact will be HKD 0.01. This is for residential customers. As for industrial customers, there is a slight decrease of HKD 0.01, but for commercial and LNG, CNG stations, there is a rebound of HKD 0.04 and HKD 0.13, respectively. We are also following closely the increase of our procurement cost, because now we are in winter, so it's worth looking at. Now in winter, what we are seeing is that for non-residential customers, the average increase is at 27%. If we look at the total pie, the average increase of gas resources cost is 40%-50%. As for procurement cost for non-residential customers, we are talking about HKD 0.27 per cubic meter. Now, we have 80% of gas companies who got the approval to increase the price. This is the foundation upon which we can do the work of increasing price well. As for city gas projects, the average connection fee increased from 2,496 to 2,500. We have covered 125 million city customers. Our penetration rate is increased to 59.8%. In the past half year, we have seen 20 cities increasing their connection fee. The average price hike is 18 to 35 cents. Now for LPG. We are the biggest distributor of vertical integration of the value chain of LPG. Let us then look at the volume. Volume is up 1%, from 1.938 to 1.95 million. As for the breakdown, we have retail up by 9.6%, so the total sales volume is increasing by 1%. But why is the sales volume at the same level over the last year? In the first half, due to the increase in demand for oil, the LPG import price increased as well. The procurement price and the sales price have both increased by around 30%. As for sales price, there is a 30% increase. As for the GP margin, it has increased a little bit. The cost has remained on the same level. With that, it will have an impact on demand. This year, especially in the first quarter, from April to June, the fluctuation was very serious. To control the risk, we took the initiative to decrease the volume. The volume for wholesale has seen some year-on-year decrease, but GP margin per ton has still increased. As for revenue, we have seen 45% of year-on-year growth for revenue. Now it's HKD 9.812 billion. Gross profit is increasing to HKD 721 million. There is a HKD 178 million of ForEx gain and loss. ForEx loss, actually, that was due to the depreciation of RMB in the first quarter. The impact was very clear. In the second quarter, we managed to change our strategy. We have fixed the foreign exchange rate of our foreign currencies, so there was no ForEx loss in the second quarter. We will be doing the same in the future so that we can control the risk of this regard. If we exclude ForEx loss, core operating profit is at HKD 264 million, down by 6.3%. That is an increase of G&A. Our LPG business has covered more provinces, from 16 to 19 provinces now. With business expansion, of course, we need to expect some increase in administrative expenses, but the volume will ramp up in the future. For the reasons above, our GP margin has seen a decrease of 2.4 percentage points, which is 7.4%. This is the distribution of our LPG business. You can see there is a clear trend of moving northwards. As for value-added services, I'm sure you know that we have 32 million terminal customers, and we offer all kinds of services to these end customers, including installation of gas facilities, water purifiers, gas alarm system, bottled water, and maintenance equipment conversion services. We have a series of value-added services. Our revenue in the first half has seen 45% of increase to HKD 1.011 billion. Our gross profit, HKD 416 million. GP margin, down to 41.2% from 50.3%, mainly due to the change in product mix. Of course, we cannot expect those business which is increasing is all high GP margin business. If we have some low GP margin business, of course, our profit will be offset a little bit. In the first half, the GP margin is actually higher than that of the total year of last year. Our operating profit has seen the same trend in increase with the GP margin, and OP margin is up 33.8%, down by 7.6 percentage points. We should not forget that RMB has a depreciation of 3.5% against Hong Kong dollar, which is having some impact as well. In the first half, our gas stove has seen slowed sales. We have controlled our pace of connection, which has affected the sales of wall-hung boilers. So much for value-added services. Now for financial performance. If you look at the income statement, our revenue is up 38.3% to HKD 28.8 billion. We have five parts in the breakdown. We have gas sales, which is increasing 41.4% year-on-year to HKD 11.9 billion. Connection fees are up 35.4% to HKD 5.3 billion. LPG sales and value-added services I've already covered. Now we have a new item, which is called engineering design and construction. There is a revenue for that of HKD 766 million. In 2017 and 2018, we have used this new structure. If you can benchmark to the first half, there was a decrease of 26.9%. You may ask why. If you look at the business breakdown, the total revenue is increasing. Most of it was because of the intrinsic business, internal business. For example, our engineering business. We have established five coal to gas platform companies. As for gas connection, it is not to be offset because they are associates. If we offer gas resource engineering project, this is to be offset. If we are talking about the coal to gas companies, which are our wholly owned subsidiaries, the revenue will be offset. Our operating profit, our EBITDA profit is still very high. If you look at the total revenue, which is still increasing very fast, now we are only looking at the consolidated revenue. The total gross profit is increasing 18.9% to HKD 6.5 billion. EBITDA, HKD 5.8 billion, up by 18.1%. There is one-off items, which are HKD 198 million, which was HKD 180 million last year. As for ForEx change, it was about HKD 200 million. It was an exchange loss. There is gain or loss on disposal of associate companies, JV or PPEs. In this part, we have Hohhot, which is a city, which is the capital of Inner Mongolia. Now we increased the shares in this JV from 51% to 63%, which becomes a subsidiary. On the income statement, this is revenue from associate company. I am sure you have noticed that on the income statement, on the monthly statement that we disclosed, it reflects that we have sold some shares of Zhongyu Gas, which brought us a positive revenue of around HKD 200 million. There was another associate company bring to us some positive income. This combined would be HKD 650 million. We have taken away the ForEx loss, which is around HKD 40 million, which is from the Zhongyu Gas company. Our options involves fees of HKD 162 million. In total, we have withdrawn HKD 807 million of options and incentives. These other revenues all reflected in the income statement. Now we are talking about the core profit. We can look at the net profit for shareholders and EPS from 68.3 to 84.2. If we exclude the one-off factors, compared with last year, there is an increase of 21.8%. We decided to give dividends of HKD 0.08, which is same as last year. This is not including the consideration of 3.5% of exchange loss. If we include these factors, the profit attributable to shareholders will be even increasing faster. This is the change of the profit. As for balance sheet, you can see the total assets have increased to HKD 93.5 billion. Total equity increased to HKD 34.7 billion. Shareholders equity, HKD 29.5 billion. Cash, around HKD 10 billion. Short-term borrowings has decreased from HKD 11 billion to HKD 8.4 billion. Our long-term borrowings increased from HKD 21.2 billion to HKD 24.3 billion. LPG trade finance has decreased a lot compared with the end of last year. Our interest-bearing finance has increased, but our cash has increased by HKD 150 million. The net interest borrowing has actually gone down. If we exclude LPG trade finance, the borrowings are actually at the same level of those of last year. If you read the financial report this year, it would be probably more complex than that of last year, because there are two major changes in the Hong Kong Financial Reporting Standards, mainly regarding balance sheet. HKFRS 15 includes contractual income, which replaces the 11th item, which was for engineering contracts. Receivables, connection fees, installation fees are re-categorized into the item of contract asset. There was a new item on the financial report. Payables are re-categorized into contract liabilities. That means I receive money, but I have done nothing as for the connection, installation, engineering projects. You will probably ask, if you compare your receivables with the end of March, what are the changes? Now for contract liabilities, we exclude the prepayments. The real receivables in the contract asset, HKD 4.9 billion plus HKD 3.9 billion. We have HKD 8.4 billion, and HKD 3.5 billion is from coal to gas project. Last year, the receivable engineering costs plus receivables would be HKD 6.1 billion. In the first half fiscal year, because of the coal to gas projects, because of the successful installation, without which we cannot get the approval of subsidy. Because of that, there was an increase of receivables of around HKD 2 billion. As for contract liabilities, which is HKD 5.2 billion. There was HKD 942 million of payables for engineering costs. In the previous financial report, there was receivables from customers. If you do not notice, it is in the footnotes. The item was there. What does contract liabilities mean? That means the pre-received assets have increased from HKD 4.5 billion to HKD 8 billion. Now, the proportion of coal to gas projects have increased a lot. For this, we are talking about HKD 5.18 billion. There is an increase of HKD 3.9 billion for coal to gas projects. We have covered this in the past. In the last fiscal year, we have connected 400,000 customers and received CNY 1 billion. It is around 80% for the receivables rate. In mid-year, we have connected 55,000 customers. That means HKD 1.65 billion of connection fees. The receivables rate has increased to 92%. There is an increase in the rate of receiving payment from the customers. As for the total fiscal year, considering the situation of gas resources, the target is to connect 1 million households. With that, we expect that we will receive an additional payment of CNY 1.2 or CNY 1.3 billion of government subsidy. That is for balance sheet. That is why I spent a bit more time explaining that due to the changes of the Hong Kong Financial Reporting Standards. As you can see, sales of gas has contributed to 1.4 profit before tax. Engineering, design, construction, this was combined with another item. LPG sales has increased. In the past, these items were just put together. Our engineering companies, our designing companies would do some business, like connection and installation of our associate companies. Besides, you may see the direct cost, but you have not seen that for connection and engineering and installation, it entails sales, expenses, marketing, for example. If we are talking about an old customer, existing customer, you have to pay for the property management companies, and you have to pay for the salary of the salesman, and you have to pay for the management fees for the installation services. These are not included in the direct cost. These items were included in sales and administrative costs. We are talking about a huge work of connection. It involves management fees, admin fees, which were not included in the direct cost. They are in the OP margin. We are talking about a profit margin based on total cost. In the future, we would use the same methodology and classification in disclosing our revenue. Every time we disclose our performance, we will give a breakdown. If you can expect the future, the EBITDA will be decreasing to below 20%, as for engineering, design, construction. The profit margin would see a significant increase. Now for future strategy and outlook. Like we said before, our strategy is very stable. Every year, we are adding 10 to 20 projects to our portfolio. We will also speed up connections to old and new residential buildings. We still have 40 million customers to connect. Now, we still have 15 million customers to be connected, so we still have a huge room of improvement. As you can see, the newly built buildings are decreasing, and the property market is not promising. That will, of course, affect our speed of connecting new projects. In the future, our connection will have some reason to be increased. For example, we can connect to the existing buildings to maintain the level of improvement for city gas projects. That has been our strategy for some time. Third, coal to gas projects for industrial and commercial customers. 40% of industrial customers is from a coal to gas project. China is working very hard to fight against pollution. In Yangtze River Delta and Pearl River Delta and in regions around Beijing, more stringent anti-pollution policies will be rolled out. China will phase out these low-efficiency boilers. If we are talking about replacement of coal with gas, which has been covered already, now we have signed 5.5 million customers. By the end of September, we have completed 2.3 million customers. We will continue to implement the strategy. Coal to gas projects will lead to increase in gas volume, which will lead to the increase of value-added services, for example, on wall-hung boilers, which we will see an increase in the second half of this year. This is about coal to gas projects. As for value-added services, every year, we are talking about 5 million new customers. In the coming years, we will increase the conversion rate of these customers in using our new value-added services. Now, our conversion rate is still very low. In the future, we will increase the conversion rate. In the future, we will also create new business models. For example, in the first half, we worked with Xiaomi, and they sell products with our channels. That has brought us very significant revenue. That also boosted our sales of our own branded product. We will expect more partnership like that. We will also provide grid-like services to customers. We will be using new management methodologies and software-based solutions to increase the level of service. As for LPG, we will increase the utilization rate of assets. In the mid-term, the number is not very promising, but we are making some groundwork which will pay off in the future. We are doing in two aspects. First, deep processing. For example, LPG used in material, using LPG to produce the chemical products like butane and other chemical products. That will increase our sales of LPG, and we will use new technologies to capture the new opportunities in the rural development. We can use technology, for example, little cylinders. We can convert more LPG projects in rural areas to piped gas projects, and in the future, that will lead to the fast increase of LPG projects. In the end, we will look at the integrated resource projects. We are talking about combined electricity generation, et cetera. The total area we have covered is around 2 million square meters. This is for our future strategy outlook. In June, we released our whole year performance, and this outlook was in line with that. We are still looking at 25% plus increase per annum for this year. As for pipeline and trade, we are also looking at a double-digit growth. As for connections, 4.7 million, which has not changed. LPG, which we believe is a potential market, for that, we maintain our target at 4.5 million. As for value-added services, 40%-50% per annum. This is basically my presentation. Thank you.