Zhejiang province’s sudden move to reduce gas sales margins caught suppliers, and their investors, completely off guard.
Investment banks, which failed to flag a warning beforehand, are now rushing to figure out which provinces may follow suit and which gas distributors will be most affected.
The incident once again demonstrates how unpredictable the earnings outlook of utilities firms in China are, as they do not receive a regulated return like many of their peers in North America and Europe.
When policy changes, you have to run the numbers all over again.
Guangdong, Hubei and Sichuan are tipped to be provinces that may follow Zhejiang’s action, because of their relatively high gas sales margins, a report from J.P. Morgan says.
Cuts in Anhui and Hebei are also likely, as they have previously showed an intention to curtail returns on gas projects.
The report said Towngas China Co. Ltd. (01083.HK) is one of the most vulnerable under those scenarios.
Meanwhile, China Resources Gas Group Ltd. (01193.HK) has been downgraded by Bank of America Merrill Lynch, which sees the firm as the biggest loser from Zhejiang’s gas tariff adjustment.
“Channel checks show four more provinces may follow with similar cuts,” the bank said.
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