20181220-招商证券_香港_-Gasifying_China_23页_2mb

Industry Report Summary: Gas Sector in China

Core Content

This report provides an analysis of the gas sector in China, focusing on demand trends, supply constraints, policy developments, and investment opportunities. It highlights the resilience of gas demand in 2019, driven by government environmental policies and the price competitiveness of natural gas. The report also discusses the gradual removal of supply constraints through increased LNG imports and midstream infrastructure development, while addressing the policy risks and their impact on the sector.

Main Views

• Gas Demand Growth:
  Gas demand in China remained robust in 2018, with an 18% YoY increase to 225bn cu m in Jan-Oct 2018. This growth is attributed to government environmental policies and the competitive pricing of natural gas. The report forecasts continued growth to reach 360bn cu m by 2020, as the government aims to increase the share of natural gas in the energy mix from 7% in 2017 to 10% in 2020.

• Supply Constraints Alleviating:
  Despite a gas shortage in 2018, the problem is expected to ease in the mid-term. This is due to the increased operation of LNG terminals and higher piped gas imports from Central Asia and Russia. China's reliance on gas imports is projected to rise from 39% in 2017 to 46% in 2020.

• Policy Risks:
  Policy risks related to connection fees will continue through 1H19, but are expected to be manageable. The government's cost-plus model for regulating connection business aims to normalize operating margins at <20%, which is within acceptable levels. The low penetration rate of gas in China (47%) and safety concerns also play a role in limiting significant cuts in connection fees.

• Investment Recommendations:
  The report recommends investing in companies with diversified business models, particularly China Gas (384 HK) and ENN Energy (2688 HK). China Gas is favored for its aggressive rural expansion and government subsidies, while ENN Energy benefits from its early move into LNG imports and distributed energy solutions.

Key Information

Financial Highlights

Policy and Environmental Initiatives

• The Chinese government has been promoting coal-to-gas conversion since 2016, especially in residential, commercial, and industrial sectors, to combat air pollution.
• In 2018, the "Three Years Action Plan for Fighting for the Blue Sky" expanded the coverage of anti-pollution regions, including the Yangtze River Delta and Fen-Wei Plain.
• The 2018-2019 winter pollution control plan aimed to convert 3.62mn residential households to gas or electricity heating by Oct 2018, with a focus on reducing coal usage.
• The government has also introduced policies to accelerate the construction of gas storage facilities, ensuring stable supply and improving the market mechanism for ancillary services.

Market Trends and Price Competitiveness

• Natural gas has maintained its price competitiveness relative to LPG and fuel oil, especially when oil prices remain stable at US$50/barrel.
• As of 31 Oct 2018, the average price of industrial natural gas was 25% cheaper than LPG and 43% cheaper than fuel oil.
• The price difference between natural gas and other fuels is expected to remain favorable, supporting continued demand growth.

Supply and Demand Outlook

• Domestic gas production has not kept pace with demand growth, with a projected 6.1% CAGR to reach 160bn cu m by 2020.
• Unconventional gas sources such as shale gas and CBM are expected to contribute significantly to the incremental supply.
• The gas import ratio is expected to rise from 39% in 2017 to 46% in 2020, with pipeline gas and LNG imports playing key roles in this growth.

Investment Insights

• The report emphasizes the importance of diversified operations and government support in selecting top picks.
• China Gas is highlighted for its aggressive rural expansion and strong foothold in North China, supported by subsidies and long-term growth potential.
• ENN Energy is favored for its early involvement in LNG imports, which helps in cost savings and market share expansion, along with its first-mover advantage in distributed energy.

Conclusion

The gas sector in China is expected to maintain resilient demand in 2019, driven by environmental policies and price competitiveness. Supply constraints are gradually being alleviated through increased imports and infrastructure development. The policy risks are manageable, and diversified gas operators are positioned to benefit from the ongoing growth. The report recommends China Gas and ENN Energy as top picks for investment.