Shares of natural gas distributors have gone up by about 30 percent on average in year to date. Amid this situation, there is this question: should investors continue to buy the stocks at current levels?
China’s worsening pollution is set to drive demand for cleaner fuel. Currently, natural gas accounts for 6.5 percent of the nation’s energy consumption, far below the global average of 25 percent. Authorities aim to boost gas usage to 10 percent of the energy pie by the end of 2020.
This means the sector offers long-term investment value.
But profitability of gas companies swings along with two key factors: industrial production and new housing completions.
Brisk industrial activities boost gas usage, as industrial clients are heavy users.
Meanwhile, when the housing market is booming, gas distributors get to earn hefty installation fees, in addition to income from gas sales to residential clients.
A pick-up in the nation’s industrial and housing sectors since last year has been an important catalyst for the strong share price performances.
Another catalyst comes from the National Development and Reform Commission (NDRC). The authority has clarified that return for downstream gas transmission assets will be capped at 7 percent instead of the rumored 6 percent.
When considering whether it is still worthwhile to hold counters in this sector, investors should think about, among other things, whether China’s property market can still retain its bullish trend like what we have seen over the past few years.
One should bear in mind that the mainland central bank has outlined a plan to revert to a more neutral monetary policy and that the US Fed also plans to shrink its balance sheet.
This article appeared in the Hong Kong Economic Journal on July 11
Translation by Julie Zhu
[Chinese version 中文版]
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