19 March 2019
The structural growth trajectory of China's natural gas industry remains intact. Photo: Xinhua
The structural growth trajectory of China's natural gas industry remains intact. Photo: Xinhua

Secular vs cyclical growth: How to tell them apart

A number of coal-fired power companies have posted 30-40 percent profit growth, mainly due to falling coal prices.

By contrast, gas-powered operators have reported about 10 percent earnings expansion.

Also, coal-fired plants have a price-earnings (PE) ratio of five to six times while gas operators have a staggering 20 times PE.

In fact, coal-fired power plants have had limited earnings growth due to the sluggish economy.

Their profit rise mainly stems from slumping coal prices while their revenue remains flat but their costs have been cut by half.

That’s why their profits have doubled.

But is this growth structural or one-off? Will coal prices continue to slip as happened in the past two years?

Natural gas companies have reported growth in both revenue and profit.

At present, natural gas accounts for just 6 percent of China’s energy consumption, lagging the global average of 24 percent.

That could change when China starts to use more green energy sources to tackle worsening air pollution.

Natural gas companies listed in Hong Kong are downstream city gas suppliers.

Lower natural gas prices will help popularize the clean energy among end-users.

The economic slowdown might put pressure on profit growth for gas companies but the structural growth trajectory remains intact.

Growth fundamentals

The huge valuation gap between fossil-fuel plays and natural gas stocks comes down to the fact that one has secular growth while the other has cyclical growth.

Political risk is another factor in differentiating the two types of stocks.

Hong Kong-listed coal-fired power plants are mostly state-owned.

A number of related stocks such as railways, toll roads and infrastructure plays have seen plunging profits.

The National Development and Reform Commission announced lower on-grid and retail thermal power tariffs from Jan. 1 this year that will affect the profitability of fossil-oil companies.

Investors are expected to avoid them for fear of further tariff cuts.

By contrast, the government makes little intervention in the natural gas sector which has seen a high degree of participation by private companies.

Natural gas stocks have maintained steady profit growth in past 10 years.

Meanwhile, global equity markets have shown a modest rebound after dovish comments on Tuesday by Federal Reserve chief Janet Yellen about US interest rates.

The Fed’s cautious stance has checked a rally in the US dollar and provided some relief to commodities.

Also, it helped ease China’s capital outflows as lifted some weight off the Hong Kong economy.

The Fed decided to delay a rate hike because of global deflationary risk and a faltering economic recovery.

Also, negative factors remain after the cyclical bounce.

This article appeared in the Hong Kong Economic Journal on April 1.

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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