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Morningstar | HKCG Posts Solid Fiscal 2018 Result; No Impact on Strategy Expected From Change of Chairmanship

Hong Kong and China Gas’s solid fiscal 2018 result also saw Dr Lee Shau Kee announcing his intention to step down as chairman of the company, handing the reins to his sons, Dr Lee Ka-kit and Lee Ka-shing, as joint chairmen. This was expected and the transition was imminent given the age of Dr Lee Shau Kee, in our view, and we do not expect operations to be significantly affected at Towngas or China Towngas. Continuity will likely result in existing management staying on, with the overall strategy remaining intact. The Hong Kong gas operation will remain the core free cash flow generator, with the China city gas operation and new energy underpinning growth in the medium term.

With investments in city gas operators on mainland China slowing because of limited opportunities and capital expenditure moderating, we expect a steady increase in return on invested capital in our explicit forecast year as the company reaps returns from past investments. Strong growth was reflected in the fiscal 2018 result with customer numbers rising by 8.5% for its China operation. Combined with stronger consumption growth of 8.7% in volume per customer, this has translated into revenue growth of 27% for its China operation. From a regulatory perspective in China, management noted improved transparency and more immediate pass through of gas prices, also for the more sensitive residential segment. Our fair value estimate increases to HKD 14.80, from HKD 13.50, while factoring stronger growth in China and new energy ventures into the current share price.

Excluding the revaluation of the International Finance Centre, net profit was 3.9% higher at HKD 7.3 billion. The Hong Kong business was resilient, with the number of customers rising 1.3% and volume per customer also increasing by 40 basis points. A revenue increase of 7.4% was also supported by stronger equipment sale. Housing unit completion over the next five years will underpin a steady increase in customers over the medium term and the conversion of diesel to gas and gas cooling applications in the commercial and industrial segment will support a low, but steady increase in gas volumes. A tariff increase is expected in fiscal 2019 and we expect a similar rate increase of 4.3% in 2019. This is consistent with historical increases, which has occurred every second year as the company remains conscious about the impact of steep price increases on households.

In the New Energy segment, the company acquired a 26% stake in Foshan Water in October last year. The strategic investment will see the two companies invest in water projects, along with water and municipal waste treatment. Management noted the similarity between kitchen waste and water treatment. The acquisition is in line with the group’s overall strategy in new energy: turning low value feedstock into higher value products. Its investments have already seen success in turning fatty acid such as palm acid and used cooking oil into Hydrotreated Vegetable Oil, or HVO, at its plant in Zhangjiagang. Better pricing from higher demand resulted in the HVO load being shipped to Europe.