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Morningstar | China Gas Holdings Reports Largely in Line First-Half Results; Positive Guidance Intact

China Gas Holdings, or CGH, is involved in the wholesale and retail businesses of natural gas and liquefied petroleum gas, or LPG, in China. Benefiting from its exclusive city gas concession rights and efficient scale, the firm has been able to generate returns above its cost of capital. We expect these excess returns to be sustainable over the next decade, supporting our narrow moat rating for CGH.We believe the government remains committed to boosting the usage of natural gas to ease pollution issues, and CGH should be one of the main beneficiaries. Management has focus on replacement of coal with gas projects for winter heating in township-level regions of Northern China, being one of the first movers in venturing into rural city gas projects in large scale. We project CGH’s retail natural gas sales volume will grow at a 22.9% CAGR during fiscal 2018-23.In our view, the establishment of the Shanghai Petroleum and Natural Gas Exchange and the gradual opening-up of gas pipelines for third-party access in the long run will lead to a market-oriented reform of natural gas pricing and promote healthy growth for city gas operators. As such, CGH is well positioned to capitalize on this positive trend.Meanwhile, the turnaround in CGH’s LPG business could be a potential earnings catalyst on the back of rising demand and increasing utilization of its infrastructure. On the other hand, operating profit for the value-added services segment (such as sales of insurance and appliances) grew 161.7% year over year in fiscal 2018. While still contributing less than 10% of the group’s total earnings, we anticipate this segment to be a new earnings growth driver going forward, as it will benefit from abundant cross-selling opportunities, taking advantage of the group’s more than 30 million customer base. CGH has also ventured into new businesses such as distributed energy and electric charging posts, and we think these will be a longer-term growth story.