The Hang Seng Index closed above 23,000 points for the first time in two weeks on Thursday, but the gas sector slumped nearly 10 percent.
Beijing has issued a notice asking local governments to cut the retail price of natural gas. That would inflict a heavy blow to gas companies.
Investors should not be too surprised. In China, you invest in infrastructure, such as highways and power plants, in the early years, then go to gas pipelines and telecom networks. Later you shift to wind farms and smart cities.
The National Development and Reform Commission has proposed setting gas transmission fees for companies rather than for individual pipelines. Operators were asked to submit their views before Dec. 30.
The move is aimed at delivering cheaper natural gas to end users and would benefit livelihood and the overall economy.
However, that comes at a price paid by gas companies, which are forced to share part of their profit with the public.
It remains unclear what specific measures local governments will take, but it is likely that gas companies will be asked to cut pipeline fees.
That’s the reason a number of gas stocks plunged.
Natural gas is subject to government regulation as utility services.
Local governments can adjust fees and prices anytime, and gas companies have little power to oppose such moves. They have to accept the new policy.
In fact, gas companies have long expected this move.
Gas pipeline investment started to take off in the mid-2000s. Industry players have been aggressively expanding their operations nationwide since then.
If one gas company wins the bid in a certain city, it could dominate the city’s gas sector because it often operates like a monopoly.
Local authorities used to be very generous towards gas operators, and even offered various subsidies to improve the fuel mix.
Given their wide profit margins, gas companies have always been viewed as high-growth stocks over the past decade.
These stocks usually have a price-earnings ratio of over 30 and price-to-book ratio of above 3. They are valued far above other infrastructure stocks.
However, most third-tier cities have already completed their pipeline networks, which means local authorities no longer need to provide incentives to lure private investors.
It’s time to tighten price control and squeeze profit.
Governments naturally try to attract investors and let them enjoy good profits in order to push certain public services, but will start to tighten when the market has taken shape.
In western nations, price adjustment usually comes in the form of contracts. But in China, it just comes from lips of government officials.
Anyway, investors can still collect some road and power plants at low levels, while the valuation of gas stocks should return to the level of average infrastructure stocks.
In fact, some smart gas operators have already diversified their revenue sources.
For example, Beijing Enterprises Holdings (00392.HK), a leading gas company in northern China, acquired Germany’s leading energy-from-waste company EEW for 12.5 billion yuan (US$1.87 billion).
It intends to introduce EEW’s technology into China.
Local gas companies like China Suntien Green Energy Corp (00956.HK) and Beijing Jingneng Clean Energy Co. (00579.HK) are expanding into wind energy, photovoltaics and other new energy sectors.
This article appeared in the Hong Kong Economic Journal on Sept. 2.
Translation by Julie Zhu
[Chinese version 中文版]
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