384 PDF

Initiating Coverage, 11 May 2015
China Gas Holdings (384 HK)
Buy
Energy & Petrochemicals - Oil & Gas Services

Market Cap: USD8,542m
Target Price:
Price:
HKD16.10
HKD13.24
Macro
Risks
For a Cleaner Sky
Growth
Value

Price Close
Relative to Hang Seng Index (RHS)
17.0
146
16.0
137
15.0
129
14.0
120
13.0
112
12.0
103
11.0
95
10.0
250
86
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
50
May-14
Vol m
100
Source: Bloomberg
Avg Turnover (HKD/USD)

Cons. Upside (%)
Upside (%)
52-wk Price low/high (HKD)
Free float (%)
Share outstanding (m)
Shareholders (%)
144m/18.7m
20.5
21.6
11.1 - 16.1
41
5,002
Beijing Enterprises Holdings

Liu Ming Hui
SK E&S Co., Ltd.
22.5
20.7
15.6
Share Performance (%)

YTD
1m
3m
6m
Absolute
8.3
(6.9)
4.9
(2.5)
12m
16.3
Relative
(8.8)
(12.3)
(7.1)
(19.9)
(10.3)
Shariah compliant
Charles Zhang +852 2103 5842

charles.zhang@rhbgroup.com
Strengthened efforts to fight pollution and emissions. The Chinese

Government has strengthened its efforts to tackle pollution. As part of
these efforts, we believe the authorities will have to push forward coal to
gas projects to achieve the target of doubling natural gas consumption
by 2020. We forecast Chinas overall natural gas consumption could
witness a fast growth (2014-2020F CAGR: 11.6%, 2014-2025F: 9.2%). A
new wave of gas inflows, particularly through the planned Russia-China
pipelines, could provide adequate supplies for the shift to gas from coal.
Gas price cut is positive. We believe further cuts in city gate gas prices
(such as the one on 1 Apr) could lead to higher earnings, as: i) gas
consumption is likely to be stimulated, and ii) GPM could improve as a
cut in ASPs vs unit gas costs is likely to be lower in percentage terms,
even if the dollar amount of the cut is the same.
China Gas Holdings (CGH) well-positioned to ride the trend. We
believe CGH is well positioned to benefit from the industry trend, given
its massive exposure to the North-East and North China markets. The
strategic alliance with Beijing Enterprises Holdings (BEH) (392 HK, NR),
its largest shareholder, could also support its expansion plans in these
regions. We expect Chinas strengthened efforts in promoting natural
gas consumption to continue driving CGHs growth into the future.
Initiate with BUY, HKD16.10 TP (22% upside). Our DCF-derived TP
implies a 23x FY16F (Mar) P/E, which is above the sectors 16.8x
average FY15F (Dec) P/E. We think CGH deserves a premium, given its
huge exposure to North-East and North China, as well as BEHs support.
Please also refer to Figure 3 and 9 for our sensitivity analysis.
Key risks. i) lower-than-expected margins of its liquefied petroleum gas
(LPG) business, ii) slower-than-expected growth in natural gas sales,
and iii) lower-than-expected connection fee income.
Forecasts and Valuations
Mar-13
Mar-14
Mar-15F
Mar-16F
Mar-17F
Total turnover (HKDm)
17,956
26,008
33,799
41,880
52,805
Reported net profit (HKDm)
1,764
2,576
3,050
3,594
4,172
Recurring net profit (HKDm)
1,644
2,512
3,009
3,594
4,172
Recurring net profit growth (%)
91.1
52.8
19.8
19.5
16.1
Recurring EPS (HKD)
0.37
0.53
0.60
0.71
0.81
DPS (HKD)
0.06
0.08
0.10
0.11
0.13
Recurring P/E (x)
36.0
25.2
22.0
18.7
16.3
P/B (x)
5.27
4.19
3.63
3.23
2.80
P/CF (x)
20.5
18.7
14.5
13.8
11.5
0.5
0.6
0.7
0.8
1.0
EV/EBITDA (x)
16.3
14.0
12.3
11.0
9.8
Return on average equity (%)
16.6
18.9
17.9
18.3
18.3
Net debt to equity (%)
80.8
73.0
Dividend Yield (%)
Our vs consensus EPS (adjusted) (%)
See important disclosures at the end of this report
.
1
0
.
2
0
0
.
2
0
0
We initiate coverage on CGH, one of Chinas largest natural gas .
0
distributors and its biggest LPG distributor, with a BUY and DCF- 0
derived HKD16.10 TP (23x FY16F P/E, 22% upside). We believe CGH is a 0
key beneficiary of the Governments campaign to control air pollution
and promote natural gas consumption. We expect cuts in city gate gas
prices to lead to higher earnings on higher volumes and GPM
improvement.
200
150
Source: Company data, RHB
62.7
53.5
42.5
(7.8)
(11.4)
(14.4)
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11 May 2015
Table Of Contents
Investment Thesis ....................................................................................................... 3
Investment Risks ......................................................................................................... 4
Valuation ..................................................................................................................... 5
Sensitivity To Gas Price Changes ............................................................................... 9
Solid Growth Prospects............................................................................................. 10
Heightened Public Concerns Over Air Pollution ........................................................ 13
Easing Supply Bottlenecks........................................................................................ 19
Falling Oil Prices Triggers Gas Price Cut .................................................................. 23
Corporate Background .............................................................................................. 26
Overview ................................................................................................................... 27
Most Active Acquisition Player .................................................................................. 28
BEHs Position In CGH To Strengthen After Acquisition ........................................... 30
Major Player In North And North-East China ............................................................ 31
Gas Station Expansion With Focus On CNG ............................................................ 33
LPG Complementary To Piped Gas .......................................................................... 34
Fortune Gas And Zhongyu Gas ................................................................................ 35
On Track To Meet FY15 Targets .............................................................................. 36
Management Background ......................................................................................... 37
Auditors ..................................................................................................................... 37
Financial Exhibits ...................................................................................................... 38
SWOT Analysis ......................................................................................................... 40
Recommendation Chart ............................................................................................ 41

11 May 2015
Investment Thesis
CGH is one of the top city-gas distributors in China second to China Resources
Gas (CR Gas) (1193 HK, BUY, TP: HKD25.60) in terms of volume of gas sold with
250 city-gas projects, the most among its peers. It is also the largest LPG operator
with 98 LPG distribution projects. We believe the companys growth will continue to
be driven by the Governments strengthened efforts in pushing coal to gas projects
and promoting natural gas consumption.
Government efforts to fight air pollution are

key for natural gas players in the foreseeable
future
Upcoming gas inflows to support large scale

coal to gas switch projects
CGH is a major beneficiary of the grand

industry trends
Gas price cut a positive move for natural gas

consumption and market-oriented reform
Lower city-gate gas prices may benefit

distributors margins
Policy supports key to natural gas consumption. With rising public concerns over
air quality in China, the Chinese Government promised to fight pollution and promote
clean energy. Switching from coal to natural gas provides an effective way of
reducing emissions and pollution levels. In order to achieve the targets of doubling
the share of natural gas in Chinas energy mix and reducing coal consumption, the
Government has strengthened its efforts in pushing forward coal to gas switch
projects and tightened regulations on emissions. We expect policies to remain
supportive of natural gas in the decades to come.
Adequate supplies secured for the shift from coal to gas. China has laid out
specific plans to abolish small coal-fired boilers and replace the capacities with gasfired boilers. Each province has promised to achieve relevant emission reduction and
coal to gas switch targets. A major factor affecting large-scale coal to gas switch
projects is supply security. In the past, shortage of supply has caused delays in some
of the projects. China has stepped up efforts in securing adequate supplies. There
should be adequate supplies of liquefied natural gas (LNG) for China over the next
10 years with new pipeline supplies from Russia of 68bn cu m (bcm) beginning in
2018 and Central Asia.
CGH has the largest presence in North and North-East China. In light of the
upcoming Russian gas pipeline, North and North-East China are expected to see
increasing natural gas adoption and further growth in demand. CGH is the largest
independent gas distributor in the country with the highest number of gas distribution
concessions among peers. We estimate that over 50 of CGHs projects are located in
key provinces in these two areas, including Hebei, Liaoning, Jilin and Heilongjiang.
The company also has other projects located in other regions of North China. CGH
has been able to strengthen its position in North and North-East China after the
acquisition of 12 gas distribution projects from BEH. Currently, the company holds
the highest number of operating rights in North and North-East China among its
peers.
April price adjustment removed uncertainty, a major step of reform. Two factors
may have led to the National Development and Reform Commissions (NDRC) move
of cutting city-gate gas prices. One is the sharp drop in crude oil prices since 2H14,
while the other is the sluggish consumption growth after the Sep 2014 price hike. As
a result of the adjustment in April, the existing volume and incremental volume prices
converged into one single price in each province. The NDRC has also moved forward
to deregulate the prices for major directly-supplied users, such as power plants,
allowing them to negotiate pricing terms with suppliers such as the China National
Petroleum Corp (CNPC). We view this as a major step in creating a more transparent
and market-oriented pricing mechanism, which will help city gas distributors to better
manage costs and negotiate pricing terms with upstream suppliers. The price cut
ought to help spur consumption by non-residential users amid slower overall
economic growth.
Margins of distributors may benefit. Lower city-gate prices may also benefit
distributors margins. During the 1-2 month period of delay in pass-through,
distributors dollar margins per unit of gas sold ought to see an expansion. After the
pass-through, ASPs will be lower, but gross margins may improve if dollar margins
are maintained. As oil prices remain at low levels, there may be a chance of another
round of downward adjustment in city-gate gas prices later this year.

11 May 2015
Strategic alliance with BEH gives CGH

support from a major SOE in the city gas
distribution space
Strategic alliance with BEH a plus. BEH is a major state-owned enterprise (SOE)
owned by the Beijing municipal government. A strategic alliance with BEH gives
CGH, an independent distributor and the needed SOE support in an industry where
frequent negotiations and cooperation with local governments are required. We
expect BEH to use CGH as its platform to expand its natural gas business outside
Beijing. CGH could also leverage on BEHs SOE status to acquire new projects and
deal with the various local administrations.
Investment Risks
Falling LPG prices may lead to underperformance of CGHs LPG business. As
oil prices have dropped substantially, one concern is that CGH may suffer from
further declining LPG prices. According to the company, its LPG retail business may
actually benefit from the fall in LPG prices, which should offset the negative impact
on its LPG wholesale business.
Sluggish non-residential gas consumption. A going concern is the substitution
effect arising from falling coal and oil prices amid slower economic growth. This will
likely reduce the incentive for industrial and commercial users to shift to gas from
coal and discourage gas consumption. We expect the impact will probably be limited,
given that we see strengthened effort and support by the Government for gas
projects. Additionally, after the effective price cut in April, natural gas has regained
some popularity with users.
Slower growth in connection fee income as property market cools. As sales of
new residential and commercial properties slow down, connection fee income may
also witness slower growth. However, there is still room for growth in connection fees
from renewal projects for old buildings, the reconstruction of aged cities and
renovation of shanty towns, especially in North-East China. There may be some
negative impact on connection fee income due to the cooling property market, but we
expect growth in connection fee income to remain largely stable as overall
penetration remains low in China.
Removal of the gas connection fee. Currently, only Guangdong and Beijing do not
charge the initial connection fee. We do not see any imminent necessity for local
governments to abolish the connection fee policy in other regions. This is because
the natural gas penetration rate remains low in most provinces and the promotion of
natural gas requires infrastructure investments.
Slower-than-expected economic growth may drag gas consumption. If Chinas
economic growth weakens more than expected and industrial and commercial
activities slow dramatically, we see natural gas consumption, particularly industrial
and commercial demand, to grow much slower than we expect currently.

11 May 2015
Valuation
DCF-based TP of HKD16.10. Through the DCF method we derive a TP of
HKD16.10, which implies a 22% upside from the current share price. CGHs share
price has risen only 7% since the beginning of 2015, and has underperformed the
other two major city-gas distributors CR Gas and ENN Energy (2688 HK, NR), which
went up 23% and 25% respectively. We believe this is partially due to the fact that
the other two players released their 2014 earnings in line with market expectations
while CGHs FY15 results would only be reported in June. Additionally investors have
concerns over the companys LPG business. We see such concerns are overdone,
given that the performance of its LPG retail business with higher margins may
offset the impact of low LPG price on its wholesale business. We think CGH
deserves to trade at the higher FY16F P/E of 23x rather that at its current 19x
multiple, given its leading position in the sector, huge exposure in North and NorthEast China, higher profit growth and ROE.
Based on our forecasted 10-year free cash flows to the firm (FCFF) from FY16 to
FY25, a WACC of 8.1% and TG of 2%, we derive a TP of HKD16.10.
Figure 1: FCFF valuation
(HKDm, unless specified)
FY 2015*
FY 2016F FY 2017F FY 2018F FY 2019F FY 2020F FY 2021F FY 2022F FY 2023F FY 2024F FY 2025F
Revenue
33,799
41,880
52,805
63,013
72,480
81,557
88,604
95,012
100,908
106,673
111,903
4,102
4,807
5,575
6,324
7,086
7,725
8,374
8,857
9,256
9,638
10,003
439
523
528
567
580
571
532
475
404
320
224
4,542
5,331
6,103
6,891
7,666
8,296
8,906
9,332
9,659
9,958
10,227
Operating EBIT
Other recurring income
EBIT (Adjusted)
Taxation (Adjusted)
(954)
(1,119)
(1,343)
(1,516)
(1,686)
(1,825)
(1,959)
(2,053)
(2,125)
(2,191)
(2,250)
Depreciation & amortisation
985
1,309
1,673
1,955
2,259
2,561
2,859
3,154
3,445
3,733
3,961
Change in working capital
669
157
390
194
206
220
419
168
165
164
144
Capital expenditures
(5,231)
FCFF
(4,777)
10
(5,016)
(5,267)
(5,003)
(4,753)
(4,516)
(4,290)
(4,075)
(4,075)
1,808
2,257
3,442
4,498
5,709
6,311
7,069
7,589
900
Terminal Cash flow
(4,075)
8,007
133,406
Discount Factor
PV of FCFF
1.01
0.93
0.86
0.80
0.74
0.68
0.63
0.58
0.54
0.50
0.46
10
838
1,556
1,796
2,534
3,062
3,595
3,676
3,808
3,780
3,688
PV of Terminal Cash flow
61,453
Note: *The numbers for FY15 (which ended in March) are shown as reference, and were not included in our 10-year DCF valuation
Source: RHB
Figure 2: DCF variables and fair value

Variables
Figure 3: DCF sensitivity
Fair value (HKDm, unless specified)
Terminal growth
Risk free
3.7%
SUMPV of cash flows
28,333
Risk premium
6.9%
PV of terminal cash flow
61,453
6.5% 17.57 18.74 20.13 21.79 23.81 26.35 29.61 33.95 40.04
Enterprise Value
89,786
7.0% 15.89 16.85 17.97 19.30 20.89 22.84 25.27 28.39 32.56
Less: Debt
20,653
7.5% 14.44 15.24 16.16 17.24 18.51 20.04 21.90 24.23 27.23
Beta
Cost of equity
Tax Rate
Cost of debt (post-tax)
0.89
9.8%
22%
Less: Minority interest
2,852
Add: Cash
7,175
Add: Associates & JVs
7,074
2.7%
24%
WACC
8.1%
Terminal growth rate
2.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
8.0% 13.18 13.85 14.61 15.50 16.53 17.75 19.22 21.01 23.24
WACC
8.1% 12.89
13.54
14.27
15.12
16.10
17.26
18.64
20.33
22.42
8.5% 12.07 12.64 13.28 14.02 14.87 15.86 17.03 18.43 20.15
9.0% 11.09 11.58 12.12 12.74 13.45 14.26 15.21 16.34 17.68
Intrinsic value
Debt/Capital Ratio
0.0%
80,531
No. of shares (m)
5,002
Fair value per share (HKD)
16.10
Source: RHB
9.5% 10.22 10.64 11.10 11.63 12.22 12.90 13.68 14.59 15.67
10.0%
9.44
9.80 10.20 10.65 11.15 11.72 12.37 13.12 14.00
Source: RHB
Our TP implies a FY15F P/E of 27x and FY16F P/E of 23x, which are above its
historical forward P/E mean of 16x and the current sector average of 16.8x FY15F
P/E. We believe the premium is justified due to CGHs faster estimated 3-year EPS
CAGR of 16% and higher ROE of 18%. In turn, we believe this is backed by its
leading position in the sector, large business portfolio with the most number of
projects, strategic alliance with BEH, and massive exposure to North and North-East
China. We see gradual improvement in the profitability of CGHs LPG business,
backed by the integration of its wholesale business with the high-margin retail wing.

11 May 2015
Figure 4: 2015 YTD share price performance of major city gas distributors
145
135
125
123
125
117
115
108
107
105
95
85
2-Jan
16-Jan
CGH
30-Jan
13-Feb
CR Gas
27-Feb
13-Mar
ENN Energy
27-Mar
10-Apr
Towngas China
24-Apr
8-May
BEH
Note: Data as of 8 May. Share prices normalised to 100 at the beginning of 2015
Source: Bloomberg, RHB
Figure 5: CGHs forward P/E band

22.00
20.00
+2SD = 27.0x
18.00
Share Price (HKD)
16.00
+1SD = 21.5x
14.00
12.00
Mean = 16.1x
10.00
8.00
-1SD = 10.6x
6.00
4.00
-2SD = 5.1x
2.00
0.00
May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15

11 May 2015
Figure 6: Peer Comparison I
Company
China Gas Holdings 384 HK
Price Mkt cap 3-mth avg

P/E (x)
(local curr.) (USDm) t/o (USDm) FY14A FY15F FY16F
13.24
8,541
20.7 22.0
18.7 16.3
EPS YoY (%) 3-Yr EPS

FY15F FY16F Cagr (%) PEG (x)
17.6 14.4
16.0
1.17
P/B (x)
FY14A FY15F
3.63 3.23
HSI
27,577
11.7
13.3
12.0
2.1
6.27
3.0
3.0
1.51
1.43
HSCEI
14,050
10.1
9.9
8.9
2.6
11.0
7.2
1.37
3.1
3.1
1.40
1.30
CSI300
4,558
19.2
16.7
14.6
14.8
14.2
15.2
1.10
1.3
1.6
2.67
2.41
21.0
16.8
14.1
25.7
20.7
14.5
1.6
1.5
1.6
2.5
1.9
Adjusted sector avg*
(11.9) 10.7
Div yld (%)

FY14A FY15F
0.7
0.8
HK-listed China gas distribution

Beijing Ent
392 HK
72.00
11,927
16.5
19.0
15.7
13.4
21.2
16.9
14.9
1.05
1.2
1.7
1.62
1.49
China Res Gas
1193 HK
24.60
7,056
12.9
21.6
18.3
15.7
18.2
16.4
16.4
1.12
1.0
1.2
3.41
2.95
Kunlun Energy
135 HK
8.90
9,266
25.7
12.8
14.4
12.1
(11.0) 19.1
8.0
1.80
2.6
1.9
1.36
1.25
Enn Energy
2688 HK
54.85
7,662
22.1
16.0
18.5
15.9
(13.4) 16.5
4.1
4.48
0.9
1.6
3.93
3.33
Towngas China
1083 HK
8.39
2,860
5.1
20.9
16.5
14.4
26.4
15.0
15.5
1.07
1.0
1.3
1.67
1.52
China Suntien-H
956 HK
1.88
901
3.2
16.5
12.8
10.0
29.5
28.0
25.5
0.50
3.0
2.6
0.76
0.71
Tian Lun Gas
1600 HK
8.00
854
0.1
23.7
15.6
11.0
51.9
41.5
N/A
N/A
N/A
N/A
4.63
N/A
China Oil And Gas
603 HK
1.04
711
1.7
16.7
9.5
8.0
76.5
18.2
N/A
N/A
0.7
0.9
1.53
1.17
Zhongyu Gas Hold
3633 HK
2.26
736
0.1
17.6
15.1
12.6
16.7
20.0
16.8
0.89
N/A
N/A
3.78
2.46
Tianjin Jinran-H
1265 HK
2.07
491
0.5
44.8
31.9
27.6
40.5
15.4
N/A
N/A
N/A
N/A
2.18
N/A
21.0
16.8
14.1
25.7
20.7
14.5
1.6
1.5
1.6
2.5
1.9
3.57
Average
A-share China gas distribution
Shenzhen Gas -A
601139 CH
10.90
3,817
34.5
30.3
24.8
21.2
21.9
16.9
17.9
1.39
1.3
1.5
3.89
Chongqing Gas-A
600917 CH
12.36
3,098
30.4
49.4
N/A
41.2
N/A
N/A
N/A
N/A
N/A
N/A
5.84
N/A
Shanxi Guoxin-A
600617 CH
19.95
3,108
25.1
46.0
31.9
22.5
44.2
41.6
36.2
0.88
N/A
N/A
9.64
7.56
Shanghai Dazho-A
600635 CH
15.29
4,051
156.3
72.8
N/A
N/A
N/A
N/A
N/A
N/A
0.5
N/A
5.71
N/A
Shaan Xi Natur-A
002267 CH
15.48
2,773
33.2
31.4
25.0
18.7
25.9
33.9
N/A
N/A
1.0
N/A
3.57
3.23
Xinjiang Haoyu-A
002700 CH
15.42
1,049
24.7
61.7
N/A
N/A
N/A
N/A
N/A
N/A
0.3
N/A
8.71
N/A
48.6
27.2
25.9
30.7
30.8
27.1
1.1
0.8
1.5
6.2
4.8
8.6
7.1
Average
Regional gas distribution
Hong Kg China Gs
3 HK
18.56
25,164
23.4
27.5
25.3
23.6
7.4
3.43
1.8
2.1
3.71
3.38
Tokyo Gas Co Ltd
9531 JP
687.70
14,019
54.9
17.6
13.8
17.1
27.7 (19.4)
3.4
3.99
1.5
1.5
1.57
1.44
Osaka Gas Co Ltd
9532 JP
483.60
8,394
28.2
13.1
13.3
16.0
(1.5) (16.8)
(3.0)
N/A
2.0
2.0
1.13
1.09
Korea Gas Corp
036460 KS
49,950.00
4,235
16.8
9.8
10.4
8.5
(5.6) 22.3
8.9
1.17
0.5
1.8
0.45
0.51
Petronas Gas Bhd
PTG MK
22.80
12,548
6.1
24.5
25.2
24.6
(2.8)
0.4
58.94
2.6
2.7
4.29
3.99
Gas Malaysia Bhd
GMB MK
2.67
953
0.7
20.4
28.4
23.2
N/A
5.0
3.1
3.46
3.33
Perusahaan Gas N
PGAS IJ
4,045.00
7,478
12.1
10.3
10.3
10.0
Rukun Raharja Pt
RAJA IJ
1,335.00
104
0.2
13.2
10.2
5.1
Gail India Ltd
GAIL IN
369.00
7,313
8.7
9.8
12.6
12.7
(22.1)
16.2
16.6
15.6
0.7
Average
2.3
(28.0) 22.3
0.0
(2.8)
3.3
3.2
3.19
3.6
4.9
2.51
2.39
29.9 100.0
N/A
N/A
0.9
1.0
2.08
1.96
(1.3)
(4.0)
N/A
2.4
2.4
1.44
1.35
13.3
1.7
14.1
2.2
2.4
2.3
2.2
Note: Share price as of 8 May.

Adjusted sector avg* only includes HK-listed China gas distribution peers.
CGH, Tokyo Gas, Osaka Gas, Gail Indias FY ends 31 Mar.
The data in the table for CGH represents FY15F, FY16F and FY17F

11 May 2015
Figure 7: Peer Comparison II
Company
China Gas Holdings
Rev FY14A NP FY14A EV/Ebitda (x)

(USDm)
(USDm) FY14A FY15F
3,354
332 19.5 14.9
Net gearing (%)

Gross margin Net margin ROIC (%)
ROE (%)
FY14A FY15F Unlev beta
(%) FY14A (%) FY14A FY14A FY14A FY15F
62.7 53.5
0.48
20.3
9.9
8.9
17.9
18.3
Sh px %
1-mth 3-mth
(6.9)
4.9
HSI
12.9
10.8
5.1
11.7
HSCEI
13.8
13.2
4.9
20.1
CSI300
13.9
14.4
6.1
37.6
13.3
12.0
4.5
20.5
11.3
23.7
Adjusted sector avg*
13.7
11.0
44.5
45.6
0.5
24.7
9.5
6.8
HK-listed China gas distribution

Beijing Ent
6,183
623
23.9
20.1
37.9
30.1
0.41
17.9
10.1
2.8
8.7
9.5
China Res Gas
3,704
320
12.6
11.5
24.8
27.6
0.62
30.4
8.6
8.3
16.4
16.4
Kunlun Energy
6,197
724
6.5
6.4
19.9
28.5
0.88
45.1
11.7
8.1
10.9
9.1
7.6
10.7
Enn Energy
4,685
478
11.8
10.4
32.1
35.5
0.59
20.9
10.2
10.5
27.4
19.8
2.3
26.5
Towngas China
1,017
136
19.2
16.7
39.8
32.9
0.31
28.9
13.4
4.2
8.2
9.4
6.2
18.7
China Suntien-H
829
54
9.0
7.2
88.5 118.2
0.30
25.2
6.5
4.3
5.0
5.9
Tian Lun Gas
216
35
14.4
N/A
53.3
N/A
(0.06)
34.3
16.4
9.5
21.3
19.3
1.4
(0.6)
China Oil And Ga
993
40
8.3
5.4
33.9
46.5
0.59
15.0
4.0
5.5
8.6
10.5
0.0
4.0
Zhongyu Gas Hold
440
42
12.1
10.4
114.5
N/A
0.34
24.9
9.5
N/A
17.8
15.5
Tianjin Jinran-H
233
11
19.5
N/A
0.0
N/A
1.09
4.9
4.7
8.1
8.6
4.8
34.4
69.7
13.7
11.0
44.5
45.6
0.5
24.7
9.5
6.8
13.3
12.0
4.5
20.5
Average
(3.5) 22.7
(12.6) 14.6
(1.7) 14.7
A-share China gas distribution

Shenzhen Gas -A
1,526
116
22.6
17.0
40.9
33.2
0.34
18.8
7.6
10.0
13.1
14.8
(4.2) 10.3
Chongqing Gas-A
913
58
32.4
N/A
0.0
N/A
N.A
13.8
6.3
7.8
11.9
N/A
(8.0) 20.9
Shanxi Guoxin-A
883
70
29.2
22.5
314.0
N/A
0.02
21.1
7.9
N/A
26.9
24.6
Shanghai Dazho-A
665
55
79.4
N/A
24.1
N/A
0.93
10.8
8.2
0.5
8.2
N/A
24.3
82.2
Shaan Xi Natur-A
853
83
16.2
13.8
53.7
N/A
0.36
17.8
9.7
8.7
13.7
12.9
1.8
12.0
Xinjiang Haoyu-A
55
17
43.3
N/A
0.0
N/A
0.64
46.0
30.7
13.4
14.9
N/A
37.2
17.8
72.1
33.2
0.5
21.4
11.7
8.1
14.8
17.4
Average
(5.6) 13.8
(3.7) 36.3
0.8
29.3
Regional gas distribution

Hong Kg China Gs
4,078
930
24.5
21.7
30.8
29.5
0.57
N/A
22.8
6.0
13.9
13.9
1.6
6.4
Tokyo Gas Co Ltd
19,101
798
7.4
7.1
55.1
N/A
0.61
N/A
4.2
6.2
9.2
10.4
(13.9)
(3.2)
Osaka Gas Co Ltd
12,733
639
7.8
7.2
50.3
N/A
0.63
N/A
5.0
4.4
9.1
8.8
(5.3)
2.1
Korea Gas Corp
34,258
411
15.8
14.2
312.7 364.7
N.A
3.8
1.2
2.0
4.8
4.4
30.9
11.0
Petronas Gas Bhd
1,220
512
15.2
14.5
2.3
N/A
1.31
50.4
42.0
14.4
17.7
16.3
(1.0)
1.9
Gas Malaysia Bhd
771
47
11.9
15.9
0.0
N/A
0.64
9.0
6.0
15.3
18.9
11.7
(0.7) (14.1)
3,409
723
7.0
7.1
19.7
10.8
0.91
43.0
21.2
11.5
24.9
24.0
(15.4) (23.0)
197
5.5
4.7
15.7
N/A
0.82
15.8
4.0
10.9
16.5
17.8
(14.4) (21.5)
9,635
748
8.0
9.2
44.4
32.7
0.94
N/A
7.8
9.0
15.6
11.0
(10.1) (12.1)
11.4
11.3
59.0 109.4
0.8
24.4
12.7
8.9
14.5
13.1
Perusahaan Gas N
Rukun Raharja Pt
Gail India Ltd
Average
(3.1)
(5.8)
Note: Share price as of 8 May.

Adjusted sector avg* only includes HK-listed China gas distribution peers.
CGH, Tokyo Gas, Osaka Gas, Gail Indias FY ends 31 Mar.
The data in the table for CGH represents FY15F, FY16F and FY17F

11 May 2015
Sensitivity To Gas Price Changes

GPM may improve if dollar margins are maintained after a price cut. After the
city-gate gas price cut in April, local governments and distributors will start to address
the issue of pass-through. Understandably, it is in the best interest of a distributor to
delay the price cut pass-through as they will be able to enjoy margins expansion.
Eventually, though, the pass-through has to be completed. When distributors
negotiate with the local authorities on this, they will try to maintain their dollar
margins. As this is most likely the case, distributors will likely see an expansion in
their GPM (see Figure 8 below).
Figure 8: Impact of adjustment in city-gate prices on gross margins
End-user
Citygate price price
Dollar margin per Sales

unit of gas sold
volume
Sales
revenue
Gross
margin
Gross pofit
(CNY/cu m)
(CNY/cu m) (CNY/cu m)
(cu m)
(CNY)
(%)
(CNY)
Down
Down
Maintained
Positive
Negative*
Positive
Positive
Up
Up
Maintained
Negative
Positive*
Negative
Negative
Note: assuming 1% change in end-user price causes less than 1% change in end-user demand.
Source: RHB
In practice, industrial users may respond positively to lower gas prices by increasing
their consumption. In the sensitivity table below (Figure 9), we apply a short-term
elasticity of -0.7 for industrial users. This means that a 1% decrease in gas price will
cause a 0.7% increase in industrial gas consumption. More importantly, we assume
that the amount of gross profit per unit of gas sold (dollar margin) stays the same.
Our sensitivity analysis for CGH shows that further cuts in ASP will lead to increases
in our TP given constant dollar margins. Supposing there was a 5% cut in ASP for
FY16 (vs our current assumption of 3% cut in FY16 ASP), our FY16 net recurring
profit forecast will be raised by 0.7% (growth will rise to 20.3% YoY from 19.5% YoY)
and our DCF-based TP will be lifted to HKD16.38 (from HKD16.10), which implies a
24% upside (vs a 22% upside implied by our current TP) to the current share price.
Figure 9: Assuming elasticity of -0.7 for industrial users, dollar margin per unit
of gas sold are maintained and other variables being constant
Change in FY16 average selling price -15.0%
FY16 Gas sales volume (m cu m) 13,236
-10.0%
-5.0%
-3.0%
+0.0%
+5.0% +10.0%
12,692
12,583
12,420
YoY +34.3% +31.5% +28.7%
+27.6%
+26.0% +23.2% +20.5%
FY16 Gas sales (HKDm) 16,490
12,964
17,672
17,889
18,203
+23.8%
+26.0% +29.4% +32.5%
41,663
41,880
42,194
+23.9%
+24.8% +26.3% +27.6%
3,095
3,068
YoY +34.3% +31.5% +28.7%
+27.6%
Gross margin - Sales of gas
3,161
3,028
42,685
19,146
YoY +19.8% +21.6% +23.3%

Gross profit - Sales of gas (HKDm) 3,227
41,092
18,694
11,875
YoY +14.1% +18.4% +22.3%

FY16 Total revenue (HKDm)40,481
17,101
12,148
2,962
43,137
2,896
+26.0% +23.2% +20.5%
19.6%
18.5%
17.5%
17.2%
16.6%
15.8%
15.1%
Gross profit (HKDm) 8,128
8,062
7,996
7,969
7,929
7,863
7,796
YoY +21.5% +20.6% +19.6%
+19.2%
Gross margin
+18.6% +17.6% +16.6%
20.1%
19.6%
19.2%
19.0%
18.8%
18.4%
18.1%
FY16 EBITDA (HKDm) 6,382
6,269
6,160
6,117
6,053
5,950
5,849
YoY +25.5% +23.2% +21.1%
+20.2%
EBITDA margin
+19.0% +17.0% +15.0%
15.8%
15.3%
14.8%
14.6%
14.3%
13.9%
13.6%
FY16 Recurring profit (HKDm) 3,744
3,681
3,619
3,594
3,558
3,498
3,440
YoY +24.4% +22.3% +20.3%
+19.5%
Net margin
+18.2% +16.3% +14.3%
9.2%
9.0%
8.7%
8.6%
8.4%
8.2%
8.0%
0.74
0.73
0.71
0.71
0.70
0.69
0.68
YoY +22.5% +20.5% +18.4%
+17.6%
FY16 Recurring EPS (HKD)
16.38
16.10
Upside (May.8 Close HKD13.24) +34.4% +29.0% +23.7%
DCF-TP (HKD)
17.80
17.08
+21.6%
+16.4% +14.5% +12.6%

15.03
14.38
+18.5% +13.5%
15.69
+8.6%
Source: RHB

11 May 2015
Solid Growth Prospects

Growth likely to remain strong for FY15-FY17. We expect CGH to continue to
deliver strong revenue growth in FY15-FY17, supported by rising gas sales, improved
LPG business and to a lesser extent connection fee income. We expect total YoY
revenue growth to reach 30% (FY15), 24% (FY16) and 26% (FY17), representing
FY15-17 CAGR of 25%. Proportion of revenue from piped gas sales and the LPG
business may increase to 44% and 46% in FY17 from 42% and 43% in FY14
respectively. Meanwhile, the share of connection fee income will drop to 10% in FY17
from 15% in FY14.
Figure 10: CGHs revenue breakdown
(HKDm)
Total revenue
FY13A
17,956
YoY
% of total revenue
Sales of piped gas
FY14A
26,008
FY15F
FY16F
FY17F
33,799
41,880
52,805
-5%
45%
30%
24%
26%
100%
100%
100%
100%
100%
7,352
10,885
14,448
17,889
23,210
YoY
-4%
48%
33%
24%
30%
% of total revenue
41%
42%
43%
43%
44%
2,709
3,837
4,552
4,949
5,321
YoY
-3%
42%
19%
9%
8%
% of total revenue
15%
15%
13%
12%
10%
Gas connection
7,887
11,277
14,773
19,013
24,242
YoY
Sales of LPG
-1%
43%
31%
29%
28%
% of total revenue
44%
43%
44%
45%
46%
25
28
32
-98%
13%
180%
12%
12%
0.04%
0.03%
0.1%
0.1%
0.1%
Sales of coke & gas appliances

YoY
% of total revenue
Overall GPM to be lower as proportion of connection fee income falls.

Connection fee income entails much higher GPM (67-69%) than gas sales (17-20%)
and the LPG business (6-8%). We forecast for the proportion of connection fee
income to gradually fall and, in turn, CGHs overall GPM will decrease to 18% in
FY17 from 20% in FY14.
Figure 11: CGHs gross profit breakdown
(HKDm)
FY13A
FY14A
FY15F
FY16F
FY17F
Total
3,776
5,286
6,688
7,969
9,562
5%
40%
27%
19%
20%
100%
100%
100%
100%
100%
YoY
% of total gross profit
GPM
21%
20%
20%
19%
18%
Sales of piped gas
1,456
1,992
2,404
3,068
3,981
YoY
37%
21%
28%
30%
39%
38%
36%
39%
42%
GPM
20%
18%
17%
17%
17%
Gas connection
1,840
2,579
3,155
3,430
3,682
YoY
40%
22%
9%
7%
49%
49%
47%
43%
39%
GPM
68%
67%
69%
69%
69%
Sales of LPG
457
756
1,123
1,464
1,891
YoY
65%
49%
30%
29%
12%
14%
17%
18%
20%
GPM
6%
7%
8%
8%
8%
Others
23
(40)
-271%
-116%
10%
10%
YoY
0.6%
-0.8%
0.1%
0.1%
0.1%
GPM
293%
-446%
25%
25%
24%
10

11 May 2015
Figure 12: CGHs detailed P&L statement
(HKDm)
Total revenue
FY12A
FY13A
FY14A
FY15F
FY16F
FY17F
1HFY14
2HFY14
1HFY15
31 Mar.
31 Mar.
31 Mar.
31 Mar.
31 Mar.
31 Mar.
30 Sep.
31 Mar.
30 Sep.
2HFY15
31 Mar.
Actual
Actual
Actual
Forecast
Forecast
Forecast
Actual
Actual
Actual
Forecast
10,461
15,547
15,588
18,211
49.0%
17.1%
(14,678)
18,934
17,956
26,008
33,799
41,880
52,805
YoY change
19.4%
-5.2%
44.8%
30.0%
23.9%
26.1%
Cost of sales
(15,328)
(14,180)
(20,722)
(27,112)
(33,911)
(43,243)
(7,984)
(12,738)
(12,434)
Gross profit
3,606
3,776
5,286
6,688
7,969
9,562
2,477
2,809
3,154
3,533
YoY change
23.9%
4.7%
40.0%
26.5%
19.2%
20.0%
12.3%
12.0%
Gross profit margin
19.0%
21.0%
20.3%
19.8%
19.0%
18.1%
23.7%
18.1%
20.2%
19.4%
(612)
Selling expenses
(733)
(661)
(871)
(1,132)
(1,361)
(1,716)
(368)
(503)
(520)
Admin expenses
(939)
(1,127)
(1,200)
(1,453)
(1,801)
(2,271)
(516)
(685)
(634)
(820)
(1,672)
(1,788)
(2,071)
(2,585)
(3,162)
(3,986)
(884)
(1,188)
(1,154)
(1,431)
Operating expenses
Opex as % of revenue
8.8%
10.0%
8.0%
7.6%
7.5%
7.5%
8.4%
7.6%
7.4%
7.9%
Operating profit
1,934
1,988
3,215
4,102
4,807
5,575
1,593
1,621
2,000
2,102
YoY change
32.1%
2.8%
61.7%
27.6%
17.2%
16.0%
23.4%
5.1%
Operating margin
10.2%
11.1%
12.4%
12.1%
11.5%
10.6%
15.2%
10.4%
12.8%
11.5%
Other income
305
368
349
439
523
528
218
130
414
25
Non-recurring items
132
144
79
52
25
55
53
(1)
79
77
57
74
91
115
35
21
45
29
(916)
(691)
(615)
(812)
(916)
(986)
(335)
(280)
(311)
(502)
86
552
636
611
757
954
298
338
238
372
PBT
1,620
2,437
3,721
4,467
5,263
6,187
1,835
1,885
2,440
2,026
YoY change
47.7%
50.4%
52.7%
20.1%
17.8%
17.6%
33.0%
7.5%
PBT margin
8.6%
13.6%
14.3%
13.2%
12.6%
11.7%
15.7%
11.1%
Interest income
Finance cost
Share of results of JV/associates
Income tax
Effective tax rate
MI
Net profit - reported
YoY change
NPM (reported)
Net profit - recurring
YoY change
NPM (recurring)
EPS - recurring (HKD)
YoY change
17.5%
12.1%
(479)
(400)
(741)
(938)
(1,105)
(1,361)
(351)
(391)
(483)
(455)
29.5%
16.4%
19.9%
21.0%
21.0%
22.0%
19.1%
20.7%
19.8%
22.4%
(188)
(272)
(404)
(478)
(564)
(654)
(202)
954
1,764
2,576
3,050
3,594
4,172
52.4%
84.9%
46.0%
18.4%
17.8%
16.1%
5.0%
9.8%
9.9%
9.0%
8.6%
7.9%
12.3%
(202)
(277)
(201)
1,283
1,293
1,680
1,370
30.0%
-18.4%
8.3%
10.8%
7.5%
861
1,644
2,512
3,009
3,594
4,172
1,263
1,249
1,638
1,371
40.0%
91.1%
52.8%
19.8%
19.5%
16.1%
31.1%
-16.3%
4.5%
9.2%
9.7%
8.9%
8.6%
7.9%
8.0%
10.5%
7.5%
0.20
0.37
0.53
0.60
0.71
0.81
36.9%
87.1%
43.0%
14.6%
17.6%
14.4%
12.1%
11

11 May 2015
Healthy balance sheet. We expect capex to be lower at around HKD5.2bn in FY15
and HKD4.8bn in FY16 vs HKD5.9bn in FY14, mainly for new project acquisitions
and the maintenance of existing projects. CGH had relatively high net debt to equity
ratio at 73% in FY14. We expect this ratio to fall to 63% and 53% in FY15 and FY16
respectively. The major M&A activity announced in FY15 is the acquiring of Beijing
Gas Development Ltd (BGD) for a total consideration of HKD2.06bn that will be
completed through the issuance of new shares to the seller, and should not affect its
debt level. CGHs most recent debt financing activity is the USD300m (HKD2.3b)
syndicated loan offered by a group of investors led by the IFC, a member of the
World Bank, to support its expansion plans in city gas distribution and gas refilling
stations. We expect CGH's operating cash flow to grow to HKD4.6bn-6.8bn in FY1416, supported by sustained growth in its businesses. Additionally, we expect the
companys receivable, inventory and payable days to remain largely stable at 66, 21,
and 109 at the end of FY15 vs 65, 20, and 108 at the end of FY17 respectively.
Figure 13: CGHs accounts receivable, payable and inventory days
120
100
80
60
40
20
0
FY12A
FY13A
Receivable days
FY14A
FY15F
Iinventory days
FY16F
FY17F
Payable days
12

11 May 2015
Heightened Public Concerns Over Air Pollution

Heightened public concern over air quality
offers an opportunity for natural gas
China has one of the worst air pollution among major economies. Smog and
PM2.5 (particulate matter with a diameter of 2.5 microns or less) air quality
monitoring gauge are the hottest topics in China nowadays. As pollution has become
increasingly visible in major cities like Beijing, public concerns over air quality have
grown drastically in recent years. Air pollution has not only resulted in domestic
concerns, but has also garnered international attention, adding pressure to the
Chinese Government to address the relevant issues. Below is an excerpt from a Wall
Street Journal report on Beijings air pollution titled Why Leave Job in Beijing? To
Breathe:
The impact of high air-pollution levels on long-term health weighs on
Chinese and foreigners alike. A recent analysis led by the Boston-based
Health Effects Institute estimated outdoor particulate matter in China was
responsible for roughly 1.2m premature deaths in China in 2010, ranking it
just behind tobacco smoking.
In the wake of soaring air-pollution readings in Beijing, many expatriate
workers are choosing to leave China due to the health risks.
Figure 14: Smog in Beijing (Feb 2013 and Feb 2014)
Source: Wikimedia, , Kentaro Iemoto
According to World Health Organisation (WHO) data, China has one of the worst air
quality readings among major economies, only second to India. The concentration of
PM2.5 in China is 4x the levels guided by the WHO, and in countries like Japan and
Canada. Among the 112 Chinese cities in WHOs database, Haikou has the lowest
PM2.5 level at 18.4 micrograms (g)/cu m, which is still over 80% higher than WHOs
guidance.
Figure 15: PM2.5 annual mean of selected countries (g /cu m)
(ug/cu m)
70
60
50
40
30
20
10
Australia
Canada
Japan
WHO guideline
US
Germany
Brazil
Korea
World average
Mexico
Vietnam
China
India
Source: WHO
13

11 May 2015
Coal is a major contributor to air pollution in China. China has a long history of
reliance on coal as a major source of energy. Based on BPs (BP/ LN, NR) world
energy statistics, in 2013, Chinas coal consumption alone accounted for over half of
the worlds total. After experiencing severe air pollution in the 1950s, advanced
economies like the UK started to tighten air quality monitoring and regulations. This
led to a continued decline in coal consumption and the commoditys proportion in
total energy consumption among the major industrialised countries since the 1960s.
While other major economies have reduced coal consumption and increased usage
of cleaner energy like natural gas, Chinas demand for coal has been soaring since
st
the start of the 21 century. Currently, coals share in total primary energy
consumption is around 19% in Organisation for Economic Co-operation and
Development (OECD) countries and 17% in European countries. In China, the
proportion of coal in total energy consumption was around 67% in 2013 and 66% in
2014 based on 2014 preliminary figures by the National Bureau of Statistics of
China (NBS).
Figure 16: Coal consumption
Figure 17: Coal as a share in primary energy consumption
(m boe)
2,500
Title:
Source:
100%
90%
2,000
80%
Please fill in the values above to have them entered in y
70%
1,500
60%
50%
1,000
40%
30%
500
20%
10%
China
US
EU
Germany
Japan
India
UK
Source: BP
China
US
EU
Germany
Japan
India
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
0%
UK
Source: BP
According to research by Natural Resources Defense Council (NRDC), the amount of

sulphur dioxide (SO2), nitrogen oxide (NOx) and smoke dust created by direct
combustion of coal in 2012 accounted for 79%, 57% and 44% of total air pollutants
emissions in China respectively. Meanwhile, SO2, NOx and smoke dust emitted by
coal-related key industries accounted for 15%, 13% and 23% of the countrys total
pollutants emissions respectively. The contribution of coal usage to Chinas overall
level of PM2.5 concentration is over 50%, ranging from 37-63% at the provincial
level. According to research by Tsinghua University, 63% of the amount of PM2.5
emission is related to the process of coal usage. This includes 31% coming from
direct coal combustion.
Figure 18: Coal consumption's contribution to
concentration of PM2.5
Figure 19: China's PM2.5 emission breakdown by sources
Scenario analysis
Possible range
National (average)
56.0%
51%~61%
Power generation
890
7%
BTH-region
50.9%
51%~62%
Heating
410
3%
Beijing
43.9%
44%~54%
Industrial boilers
1,110
9%
Tianjin
49.9%
50%~60%
Industrial production
4,790
40%
Hebei
51.6%
52%~62%
54.1%
54%~61%
Residential
4,350
36%
53.3%
53%~63%
Yangtze River Delta

Shanghai
PM2.5 emission ('000 tons)
Moving sources
Total
470
Share (%)
4%
12,030
100%
Jiangsu
53.2%
53%~63%
Zhejiang
55.3%
55%~65%
Guangdong
47.3%
47%~57%
Directly related to coal burning
3,750
31%
54%~64%
Indirectly related to coal usage
3,780
31%
Shandong
54.2%
Source: Tsinghua University, NRDC
Among which:
Source: Tsinghua University, NRDC
14

11 May 2015
In light of the heavy emission levels related to coal usage in China, reducing coal
consumption and increasing other cleaner energy consumption, such as natural gas,
shall be the most effective and practical way to control emission and improve air
quality in the near future.
Plan laid out to fight air pollution. China has officially declared war on smog and
pledged to fight it with the same determination the country battled poverty. In Sep
2013, Chinas State Council published the Action Plan For Air Pollution Prevention
and Control, targeting a 10% reduction in concentrations of large particulate matter
(PM10) in all Tier-2 and Tier-3 cities. The action plan also targeted a 25%, 20% and
15% reduction in concentration of PM2.5 in three key regions, namely the: i) BeijingTianjin-Hebei (BTH), ii) Yangtze River Delta (YRD), and iii) Pearl River Delta (PRD),
by 2017 compared to levels in 2012. According to another newly published Energy
Development Action Plan 2014-2020, the three regions will see a decline in coal
consumption by 2020. In order to effectively implement the Action Plan For Air
Pollution Prevention and Control, the Environmental Protection Ministry has signed
liability agreements on the pollutants reduction and coal consumption control targets.
All the targets of each province have been made public and will be adopted as one of
the performance indicators in the evaluation of local officials. In a certain sense,
meeting the targets of pollution control and emission reduction can be regarded as
political missions for these local officials.
Reduction in coal-fired boilers a key component of the plan. One key element of
the action plan is the elimination of coal-fired boilers or conversion to gas-fired
boilers. According to the targets set in the plan, coal consumption will be strictly
controlled in most regions and is to see negative growth or a major reduction (when
compared with 2012) in key provinces in the BTH, YRD and PRD by 2017. All the
provinces will basically abandon coal-fired boilers with capacities below 10 tonnes of
steam per hour (t/h) by 2017, and will not add any new coal-fired boilers with capacity
below 20t/h. Certain provinces, including Beijing and Tianjin, will also stop adding any
new coal-fired boilers. The near-term goal is to reduce 200,000t/h of coal-fired
boilers capacity by the end of 2015.
Expecting continued progress in coal to gas projects. In the process of
elimination and conversion of coal-fired boilers, there are two major options, namely
upgrading to cleaner coal-fired boilers with desulphurisation, denitrification and dust
removal equipments, and coal to gas projects (), in which the eliminated
capacity of coal-fired boilers will be replaced with gas-fired ones. The main factors to
be considered when making the choice between the two options are cost and
adequacy of natural gas supply.
According to the research by the Chinese Research Academy of Environmental
Sciences (CRAES), China has over 610,000 industrial boilers. Based on the data in
the report, we estimate that over 400,000 units, or around 70% of all industrial
boilers, are coal-fired ones with a total capacity of around 4mt/h in China. These coalfired boilers consume over 730m tonnes of coal annually, accounting for over 20% of
Chinas total coal consumption. This is in drastic comparison with the US, where
about 80% of boiler units and 51% of industrial boiler capacity are natural gas-fired.
Another characteristic of coal-fired boilers in China is that the majority are small and
inefficient. In terms of units, 67% of coal-fired boilers are below 10t/h, and over 80%
are below 20t/h. These small boilers are usually are sold at lower prices with limited
or zero environmental protection functions. The designed thermal efficiency is 7080%, but the actual operating efficiency may be only 60% or even lower. This has led
to wastage of fuels and high emissions of pollutants.
One major obstacle for coal to gas projects is the issue of cost. The investment for a
coal-fired boiler for upgrading and the addition of the necessary environmental
protection equipment, and the cost to purchase a new gas-fired boiler are almost the
same. If you add the expense of extra space and area required for the environmental
protection facilities of an upgraded coal-fired boiler, the cost of a new gas-fired one
may be even cheaper.
The major difference lies in operating cost. As coal prices have dropped substantially
over the past few years, and the price of natural gas has actually increased in
domestic market, coal is now trading at over a 70% discount to natural gas in terms
of the same amount of energy released. However, the cost advantage of coal may be
offset by the running cost of environmental protection facilities, low thermal efficiency,
and high maintenance cost of coal-fired boilers. This is even more obvious in the
case of small boilers.
15

11 May 2015
On the other hand, China has tightened regulation and published stricter emission
requirements for industrial boilers. The new pollutants emission standards for boilers,
which were implemented in Jul 2014, are much more demanding. They require 50%
less emissions of dust and SO2, and added the standards for NOx, mercury and its
compounds. This would further increase the running cost of coal-fired boilers in order
to meet the new emission standards.
Figure 20: Targets of coal-burning boilers elimination and conversion
Province
Shandong
Coal-fired
boilers
reduction
target 20142015 (t/h)
23,000
Boilers reduction plan by 2015
All urban below 10t/h abolish/refit, no addition

of coal-fired boilers
All urban below 10t/h abolish/refit
Boilers reduction plan by 2017
Hebei
22,000
Zhejiang
14,000
Tianjin
12,000
Jiangsu
11,000
Shanxi
10,000
Liaoning
10,000
All urban below 10t/h abolish/refit, 2,000 units

coal-fired boilers, no addition of 20t/h & below
Heilongjiang
10,000
Henan
10,000
Beijing
9,000
All below 10t/h abolish/refit

of 20t/h & below
of 20 t/h & below
All above 10t/h abolish/refit, no addition of coalfired boilers
Inner
Mongolia
Shaanxi
9,000

of 20 t/h & below
Anhui
6,000
Jilin
5,000
Shanghai
5,000
Guangdong
5,000
Hubei
4,000
Yunnan
4,000
Xinjiang
4,000
Fujian
3,000
Hunan
3,000
Gansu
3,000
Jiangxi
2,000
Sichuan
2,000
Ningxia
2,000
Guangxi
1,000
Chongqing
1,000
Guizhou
1,000
Qinghai
1,000
Hainan
Tibet
Total
200,000

of 20t/h & below
By 2016 all urban below 10t/h abolish/refit, no
addition of 20t/h & below
8,000

Coal reduction by
2017 from 2012 (m
tonnes)
-20 (capped at 380)
-20%
-40
-25%
Negative growth
Abolish 4,000 units coal-fired boilers, no

addition of coal-fired boilers in urban area

of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20 t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
of 20t/h & below
PM2.5 reduction
by 2017 from 2012)
-10
-20%
-25%
Negative growth
-20%
Zero growth in
Taiyuan (provincial
capital)
capped at 201 (2012:
182.19)
-20%
-10% (PM10)
Strictly control
-5% (PM10)
Strictly control
-15% (PM10)
-13 (capped at 10)
-25%
Increase energy
efficiency
Strictly control
-10%
-15% (PM10)
Strictly control
-10%
Strictly control
-10%
Negative growth
-20%
Negative growth
(PRD)
strictly control
-15% (PRD); -10%

(PM10, Provincial).
-12% (PM10)
Increase energy
efficiency
Strictly control
Continued
improvement
-15% (PM10)
Strictly control
-5% (PM10)
Strictly control
-10% (PM10)
Strictly control
-12% (PM10)
Strictly control
-5% (PM10)
Strictly control
-10% (PM10)
Strictly control
-10% (PM10)
Strictly control
-5% (PM10)
Strictly control
-15%
Reasonably control
-5% (PM10)
Strictly control
-15% (PM10)
Increase energy
efficiency
Increase energy
efficiency
Continued
improvement
Continued
improvement
Source: NDRC, Provincial governments, RHB
16

11 May 2015
Figure 21: Emission standard of air pollutants for coal-fired boilers
Coal-fired boilers
Unit: mg/cu m
Coal-fired boilers (New standards: GB 13271-2014)

Particulate matter (smoke & dust)
SO2
NOx
Boilers in use (Oct 2015)
80
400~550
400
Mercury & its compounds Smoke density (Ringelmann scale)

0.05
Boilers newly built (Jul 2014)
50
300
300
0.05
Boilers in key regions
30
200
200
0.05
SO2
NOx
80~100
900~1,200
120~150
900~1,200
80~100
900~1,200
200~350
900~1,200
Coal-fired boilers (Old standards: GB 13271-2001)

Natural draft boiler (region 1)
Natural draft boiler (region 2, 3)
Others (region 1)
Others (region 2, 3)
Note: Key region refers to protected areas; region 1 refers to nature reserves and protected areas; region 2, 3 refer to residential and industrial areas.
Source: Ministry of Environmental Protection (MEP)
Figure 22: Emission standard of air pollutants for gas-fired boilers

Gas-fired boilers
Unit: mg/cu m
Gas-fired boilers (New standards: GB 13271-2014)

SO2
NOx
30
100
400

-
20
50
200
20
50
150
SO2
NOx
50
100
400
Gas-fired boilers (Old standards: GB 13271-2001)

Gas-fired boilers (all regions)

-
Source: MEP
Figure 23: Emission standard of air pollutants for oil-fired boilers

Oil-fired boilers
Unit: mg/cu m
Oil-fired boilers (New standards: GB 13271-2014)

SO2
NOx
60
300
400

-
30
200
250
30
100
200
Oil-fired boilers (Old standards: GB 13271-2001)

SO2
NOx
Light diesel/kerosene (region 1)
80
500~700
400
Light diesel/kerosene (region 2, 3)
100
500~700
400
80~100
900~1200
400
150~200
900~1200
400
Other oil-fired boilers (region 1)

Other oil-fired boilers (region 2, 3)
Source: MEP
17

11 May 2015
National carbon trading scheme to be launched in 2016. Besides setting higher
emission requirements, China planned to launch a nationwide carbon emission
permit trading programme in 2016. In Phase I (2016-2019) of the plan, China will first
build a unified national platform and, in phase II, (2019 onwards), the scheme
coverage will be enlarged and improved. Under the scheme, carbon dioxide emission
will be capped at sources such as enterprises in power generation, metallurgical,
nonferrous metal, building materials, chemicals and aviation. Those enterprises
emitting above their cap will have to purchase extra quotas in the carbon trading
market. Since 2013, China has already started seven pilot carbon trading
programmes in Shenzhen, Beijing, Shanghai, Tianjin, Guangdong, Hubei and
Chongqing. The country has also made significant progress in emission control and
building a cap-and-trade market. We expect a national carbon trading scheme to
increase emission costs and provide more incentives for enterprises to switch from
carbon-intensive fuel like coal to cleaner energy such as natural gas.
Figure 24: Chinas seven carbon trading pilots
Pilot
Start date
Initial Number of
quota
entities
(m tonnes)
covered
2014
2014
2014
Recent
trading turnover
average carbon price
volume (CNYm)
price 18 Mar 2015
(m tonnes)
(CNY/tonne) (CNY/tonne)
1.85
114
61.8
42.9
Shenzhen
Jun 2013
33
635
Beijing
Nov 2013
50
543
2.11
105
49.7
51.5
Shanghai
Nov 2013
160
191
1.97
75
38.3
25.4
Guangdong
Dec 2013
408
193
1.27
66
51.9
20.2
Tianjin
Dec 2013
160
114
1.01
21
20.3
25.1
Hubei
Apr 2014
324
138
7.00
167
23.9
26.1
Chongqing
Jun 2014
125
242
0.15
29.7
24.0
Source: Resources for the Future (RFF), Shanghai Environment and Energy Exchange (SEEE)
18

11 May 2015
Easing Supply Bottlenecks

Supply security a concern in certain regions. In many regions, there have been
delays to coal to gas projects. This has been mainly due to supply bottlenecks. As
reported by the China Environment News, after the Phase I project was finished,
Tianjins Chentangzhuang () Power Plant Chinas largest gas-fired power plant
did not have enough gas supply for its trial operation. The Government is aware of
this issue and has been actively expanding sources of supply to support coal to gas
projects.
We estimate that over 30% Chinas natural gas supply in 2014 relied on imports.
Based on our forecasts, in 2015, the countrys domestic gas output will reach
158bcm while consumption will rise to 199bcm. This implies a shortfall of 41bcm. To
meet the growing demand, China has sought supplies globally. Currently, about half
of the countrys natural gas imports come through pipelines while the other half is in
the form LNG. In 2013, imported pipeline gas amounted to 27bcm while LNG imports
reached 24bcm. In terms of pricing, pipeline natural gas on average enjoy an
about 20-30% discount to LNG.
Figure 25: Natural gas domestic production and consumption
(bcm)
200
180
160
140
120
100
80
60
40
20
Production
2013
2014E
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
Consumption
Source: NDRC, NBS, BP, RHB
In May 2014, Russias Gazprom (GAZP RM, NR) and CNPC signed a 30-year
contract, in which the former will supply natural gas to China from 2018 through the
Power of Siberia pipeline. During the first five years, annual gas delivery is expected
to rise gradually to 30bcm from 5bcm. From 2023 onwards, the amount will stay at
38bcm per year. This roughly represents over 10% of Chinas forecasted
consumption in 2020. The gas pipeline will enter China at Heihe in Heilongjiang
Province, targeting markets in North-East China, and the BTH and YRD regions.
Additionally, in Nov 2014, the Chinese and Russian Governments signed a
memorandum of understanding (MoU) to pursue a western route, ie the Altai pipeline,
potentially delivering 30bcm of natural gas to the East Asian nation annually.
According to a recent speech by Chinas Foreign Minister Wang Yi, the two nations
are to sign an official agreement on the Western Russia-China pipeline by this year.
In total, the eastern and western Russia-China pipelines may deliver 68bcm of
natural gas annually, meeting close to 20% of Chinese demand by 2020.
However, there is still a question on which one of the two routes, the Power of Siberia
or the Altai pipeline, will be launched first. It was reported by Reuters in March that
there may be a delay in the construction schedule of the eastern route due to funding
reasons. Since mid-2014, oil prices have dropped over 50% and remain below
USD60 per barrel now. This has put pressure on international oil companies income
and spending. Although the delay in the western route has not been officially
confirmed, we see it is logical for Gazprom to pursue the Altai pipeline (the western
route) as a priority over the Power of Siberia pipeline (the eastern route), mainly due
to cost and strategic considerations. It has been estimated that the construction of
the eastern route would cost over USD20bn without considering the development
spending for the East Siberian gas fields, which still require more work in order to
start commercial production.
19

11 May 2015
On the other hand, the western route would cost around USD15bn and Russia is
actively seeking new customers for the West Siberian gas resources as an
alternative for its traditional European buyers. So, in terms of construction cost and
strategic benefits, Russia would naturally consider the western route as a priority, but
this is not a preferred pipeline for China, given that it needs to secure adequate
supplies for its affluent provinces in the east. Besides, the western route would
require extra spending and time to build thousands of miles of new transmission
infrastructures for China to pump the gas across the country to customers in the east.
After all, the precise timing of the launch of operation of the eastern route and the
signing of an agreement on the western route are largely political decisions. We still
expect the two governments to honour their official agreements and launch the
projects on time.
Besides the Russia-China gas pipelines, the Chinese Government is stepping up
efforts to obtain natural gas supplies from various other directions and sources.
Turkmenistan has already agreed to more than double its gas deliveries to China to
65bcm by 2020 from the current level of 30bcm per annum through the Central Asia
Gas Pipeline (CAGP). In 2013, China added natural gas imports from Kazakhstan
through the CAGP as well as Myanmar through a newly-built pipeline in South-West
China.
Unconventional gas output to rise in the medium to long term. Meanwhile, China
is also developing its own unconventional gas resources including shale gas and
coal-bed methane (CBM) to mitigate reliance on imports. According to the Energy
Information Administration (EIA), the country holds the largest reserves of technically
recoverable shale gas in the world. However, shale exploration & production (E&P)
have met with difficulties. This has led the Government to cut shale gas output target
to 30bcm by 2020 from 80bcm. We still expect shale gas output to meet about 8% of
demand in China in 2020. Besides shale gas, the country is also stepping up the
development of CBM and coal-to-gas projects. We expect shale gas, CBM and coalto-gas projects to become substantial supply factors in the medium to long term.
Figure 26: Russia-China natural gas pipelines
Two planned routes of Russian gas pipelines,

one in the east (to begin supplies by 2018)
and the other in the west
Source: Gazprom, RHB
In this context, natural gas, as a cleaner alternative to coal, is a practical energy

option for China due to its availability and mature technologies. While coal will remain
a major energy source in the foreseeable future, the Chinese Government has set
targets to increase the proportion of natural gas in Chinas energy mix. The
Government expects that, in 2020 and 2030, natural gas will account for 10% and
12% of Chinas primary energy consumption respectively. This represents a
substantial increase from 2013s 5% but is still largely below the current global
average. There is enormous room for expansion in natural gas consumption in China.
We are expecting the grand plan of a shift away from coal, which may unleash the
countrys potential for natural gas consumption and be a further boost to demand.
20

11 May 2015
Figure 27: China natural gas imports
Figure 28: China natural gas apparent consumption

(m cu m)
(m cu m)
Title:
Source:
8,000
210%
24,000
7,000
180%
21,000
6,000
150%
18,000
5,000
120%
15,000
50%
4,000
90%
12,000
40%
3,000
60%
9,000
30%
2,000
30%
6,000
20%
1,000
0%
3,000
10%
Import (LHS)
70%
60%
Please fill in the values above to have them entered in y
YoY (RHS)
Apparent consumption (LHS)
Source: NDRC, CEIC, RHB
Jan-2015
Sep-2014
Jan-2014
May-2014
Sep-2013
May-2013
Jan-2013
Sep-2012
May-2012
Jan-2012
Sep-2011
Jan-2011
May-2011
Sep-2010
0%
May-2010
Jan-2015
Sep-2014
Jan-2014
May-2014
Sep-2013
Jan-2013
May-2013
Sep-2012
May-2012
Jan-2012
Sep-2011
May-2011
Jan-2011
Sep-2010
-30%
May-2010
80%
YoY (RHS)
Source: NDRC, CEIC, RHB
Slightly slower natural gas consumption projection. In our previous forecasts, we

stated that the countrys natural gas demand could grow at CAGRs of 12.3%, 9.5%
and 7.7% for 2014-2020, 2014-2025 and 2014-2030 respectively. As the preliminary
2014 growth rate of natural gas consumption released by NDRC was only 5.6%, the
slowest in the past few years, we slightly lower our forecasts through 2015 to 2030.
We are now expecting natural gas consumption to grow at CAGRs of 11.6%, 9.2%
and 7.5% for 2014-2020, 2014-2025 and 2014-2030. The demand seems to be well
covered by adequate natural gas supply through both domestic and external sources.
We are still optimistic about the supply and demand conditions in the future.
Figure 29: China's natural gas demand
(bcm)
600
500
400
300
200
100
0
2010
2011
2012
2013
2014E
2015F
2020F
2030F
Source: NDRC, RHB
21

11 May 2015
Figure 30: China natural gas demand/supply model
Unit: (bcm )
2011
2012
2013E
2014E
2015F
2016F
2017F
2018F
2019F
2020F
2025F
2030F
565
Dem and
Total dem and
yoy
Agriculture
131
146
162
179
200
226
255
287
317
346
468
22%
12%
10%
11%
12%
13%
13%
12%
10%
9%
0.06
0.06
0.07
0.08
0.09
0.09
0.10
0.11
0.12
0.13
0.19
0.24
yoy
12%
15%
10%
11%
9%
9%
9%
9%
9%
9%
% of Total demand
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
39
47
52
55
62
71
81
90
99
108
142
160
yoy
22%
21%
10%
11%
12%
15%
13%
12%
10%
9%
% of Total demand
30%
32%
32%
31%
31%
32%
32%
31%
31%
31%
30%
28%
23
25
26
29
32
34
36
38
40
41
45
46
yoy
25%
7%
3%
14%
8%
7%
7%
5%
5%
3%
% of Total demand
18%
17%
16%
17%
16%
15%
14%
13%
13%
12%
10%
8%
22
23
26
29
35
42
51
61
70
79
117
158
yoy
19%
4%
15%
14%
20%
20%
20%
20%
15%
12%
% of Total demand
17%
15%
16%
17%
18%
19%
20%
21%
22%
23%
25%
28%
24
Industrial
Chemical
Pow er generation
Commercial (Wholesale & Retail & Hotel & Catering Service)
10
11
12
13
18
yoy
24%
15%
25%
29%
20%
15%
13%
11%
10%
9%
% of Total demand
3%
3%
3%
4%
4%
4%
4%
4%
4%
4%
4%
4%
0.13
0.13
0.13
0.14
0.15
0.15
0.15
0.15
0.16
0.16
0.17
0.18
yoy
10%
-1%
2%
11%
2%
2%
2%
2%
2%
2%
% of Total demand
0.10%
0.09%
0.08%
0.08%
0.07%
0.07%
0.06%
0.05%
0.05%
0.05%
0.04%
0.03%
14
15
18
19
21
23
26
29
32
35
51
66
yoy
30%
12%
15%
5%
10%
11%
12%
12%
10%
10%
% of Total demand
11%
11%
11%
11%
10%
10%
10%
10%
10%
10%
11%
12%
26
29
32
36
39
43
48
54
60
66
91
108
yoy
17%
9%
12%
11%
10%
10%
12%
12%
11%
10%
% of Total demand
20%
20%
20%
20%
20%
19%
19%
19%
19%
19%
19%
19%
yoy
38%
21%
-8%
11%
0%
0%
0%
0%
0%
0%
% of Total demand
2%
2%
2%
2%
2%
1%
1%
1%
1%
1%
1%
1%
137
151
173
194
241
299
326
359
386
432
538
584
yoy
22%
11%
14%
12%
24%
24%
9%
10%
8%
12%
104
109
121
136
158
187
207
225
245
260
313
359
Construction
Transportation (Transport & Sotrage & Post)
Residential
Others
Supply
Total supply/capacity
Dom estic production

yoy
9%
4%
11%
12%
16%
19%
11%
9%
9%
6%
% of Total supply
76%
72%
70%
70%
65%
63%
63%
63%
63%
60%
58%
61%
239
Conventional
103
107
118
128
139
150
160
170
180
185
214
yoy
8%
4%
10%
9%
8%
8%
7%
6%
6%
3%
% of Total supply
75%
71%
68%
66%
58%
50%
49%
47%
47%
43%
40%
41%
0.0
0.2
10
15
20
25
30
45
60
yoy
700%
550%
285%
100%
50%
33%
25%
20%
% of Total supply
0%
0%
1%
2%
3%
5%
6%
6%
7%
8%
10%
12
17
20
25
30
39
45
yoy
50%
11%
46%
23%
39%
140%
42%
18%
25%
20%
% of Total supply
1%
1%
2%
2%
2%
4%
5%
6%
6%
7%
7%
8%
15
15
15
15
15
15
15
yoy
8%
233%
67%
0%
0%
0%
0%
% of Total supply
1%
1%
4%
5%
5%
4%
4%
3%
3%
3%
32
42
52
58
83
112
119
134
141
172
225
225
16
21
27
31
48
72
74
89
96
122
165
165
yoy
337%
38%
27%
15%
53%
50%
3%
20%
8%
27%
% of Total supply
11%
14%
16%
16%
20%
24%
23%
25%
25%
28%
31%
28%
Shale gas output
CBM
Coal to gas
Im ports
Pipeline (capacity)
Russia
10
25
68
68
16
21
24
25
36
51
51
56
56
65
65
65
Kazakhstan
0.1
10
10
10
10
10
Uzbekistan
10
10
10
10
10
10
10
Myanmar
0.2
10
12
12
12
60
Turkmenistan
LNG (capacity)
17
21
24
27
35
40
45
45
45
50
60
yoy
30%
24%
19%
10%
30%
14%
13%
0%
0%
11%
% of Total supply
12%
14%
14%
14%
15%
13%
14%
13%
12%
12%
11%
10%
Source: NBS, CNPC, BP, RHB
22

11 May 2015
Falling Oil Prices Triggered Gas Price Cut

Effective cut in city-gate prices. Amid falling oil prices, the NDRC announced an
effective cut in city-gate gas prices across China beginning 1 Apr for non-residential
users. Based on our estimates, the average incremental volume price will be cut to
CNY2.51 per cu m (-14.9%) from CNY2.95 per cu m while the average existing
volume price will be raised to CNY2.51 per cu m (+1.5%) from CNY2.47 per cu m.
This move effectively achieves the NDRCs goal to see the two prices for nonresidential users converge by the end-2015. After 1 Apr, there will be only one single
city-gate price for non-residential users in each province.
Figure 31: City-gate prices before and after Aprils adjustment
(CNY/cu m)
Shanghai
Before Apr15
After Apr15
Existing Incremental Citygate

volume volume
2.84
3.32
2.88
Before Apr15
After Apr15
Existing Incremental Citygate

volume volume
2.57
3.05
2.61
Shanxi
Guangdong
2.86
3.32
2.88
Jilin
2.42
2.90
2.46
Zhejiang
2.83
3.31
2.87
Heilongjiang
2.42
2.90
2.46
Jiangsu
2.82
3.30
2.86
Guizhou
2.37
2.85
2.41
Anhui
2.75
3.23
2.79
Yunnan
2.37
2.85
2.41
Henan
2.67
3.15
2.71
Sichuan
2.33
2.79
2.35
Guangxi
2.69
3.15
2.71
Hainan
2.32
2.78
2.34
Beijing
2.66
3.14
2.70
Chongqing
2.32
2.78
2.34
Tianjin
2.66
3.14
2.70
Ningxia
2.17
2.65
2.21
Hebei
2.64
3.12
2.68
Gansu
2.09
2.57
2.13
Liaoning
2.64
3.12
2.68
Inner Mongolia 2.00
2.48
2.04
Shandong
2.64
3.12
2.68
Shaanxi
2.00
2.48
2.04
Jiangxi
2.62
3.10
2.66
Qinghai
1.93
2.41
1.97
Hubei
2.62
3.10
2.66
Xinjiang
1.81
2.29
1.85
Hunan
2.62
3.10
2.66
Average
2.47
2.95
2.51
Source: NDRC, RHB
Due to the differences in prices and volumes across provinces, distributors and
users, it is hard to precisely measure the scale of the adjustment in city-gate prices
with one standard. The impact on each distributor and user in different regions
primarily depends on the mix of existing and incremental volumes. The higher the
incremental volume, the higher the price cut they can enjoy. This would encourage
natural gas consumption, especially for users with low existing volume. As we
previously assumed, if the ratio between incremental and existing volume is 4:6, we
should see an effective cut of about 5.7%. However, if the ratio is 2:8, the effective
cut should be only around 2.2%.
Figure 32: Effective changes under different weighting
(CNY/cu m)
Weight (%)
Existing/base
90%
85%
80%
75%
70%
65%
60%
Incremental
10%
15%
20%
25%
30%
35%
40%
2.47
2.47
2.47
2.47
2.47
2.47
2.47
2.95
2.95
2.95
2.95
2.95
2.95
2.95
2.52
2.54
2.57
2.59
2.61
2.64
2.66
2.51
2.51
2.51
2.51
2.51
2.51
2.51
-0.3%
-1.3%
-2.2%
-3.1%
-4.0%
-4.9%
-5.7%
Before Apr15 Existing

volume avg.
Incremental
volume avg.
Weighted
average
After Apr15
Effective change (%)
Source: RHB
After the adjustment in April, the average city-gate price across the country is now at
CNY2.51 per cu m. However, based our estimates (see Figure 33), if the NDRC
strictly follows its own formula and closely tracks the current fuel oil and LPG prices,
the city-gate prices may be even lower. For example, assuming oil price rebound to
USD70 per barrel (vs. RHB forecasts of USD72.50 per barrel/USD80 per barrel for
2015/2016) and using the estimated 6-month moving average prices for fuel oil and
LPG, we may see the corresponding gas price to be at around CNY2.11 per cu m
based on NDRCs formula.
23

11 May 2015
Figure 33: Estimated gas price based on NDRC's netback pricing formula
Estimates
Estimates
Estimates
Unit:
Oil price (Brent)
USD/barrel
% Change
Gas price est.
Actuals
Actuals
Actuals
Actuals
Actuals
Actuals
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
70
60
50
56
58
48
62
79
87
97
+25.3%
+7.4%
-10.5%
-3.8%
+21.6%
-23.4%
-21.5%
-9.1%
-9.9%
-4.4%
from Mar-15 from Mar-15 from Mar-15
MoM
MoM
MoM
MoM
MoM
MoM
MoM
2.11
2.06
2.00
2.21
2.38
2.56
3.00
3.40
3.74
4.03
-4.2%
-6.7%
-9.2%
-7.4%
-6.9%
-14.8%
-11.5%
-9.2%
-7.3%
-0.1%
CNY/cm
% Change
Actuals
6-Month moving average

Fuel oil price
CNY/kg
% Change
LPG price
2.54
2.48
2.41
2.72
3.01
3.31
4.02
4.59
5.05
5.45
-6.7%
-9.0%
-11.4%
-9.4%
-9.2%
-17.6%
-12.4%
-9.2%
-7.3%
-0.4%
CNY/kg
% Change
3.68
3.58
3.49
3.72
3.90
4.04
4.50
5.00
5.50
5.93
-1.0%
-3.6%
-6.3%
-4.6%
-3.4%
-10.3%
-10.0%
-9.2%
-7.2%
+0.5%
References (import data from the General Administration of Customs)

Fuel oil price est.
CNY/kg
% Change
LPG price est.
2.69
2.30
1.92
2.15
2.00
2.15
2.88
3.37
3.78
3.85
+25.3%
+7.4%
-10.5%
+7.3%
-6.9%
-25.4%
-14.5%
-10.8%
-1.8%
+0.3%
CNY/kg
% Change
4.10
3.51
2.93
3.27
3.36
3.55
3.88
3.93
4.32
4.35
+25.3%
+7.4%
-10.5%
-2.7%
-5.3%
-8.4%
-1.3%
-9.1%
-0.7%
+4.3%
Fuel oil imports

Volume
10,000 tons
144
Value
10,000 CNY
308,910
157
313,928
129
277,196
190
547,616
125
421,494
115
434,799
117
450,282
LPG imports
Volume
10,000 tons
216
Value
10,000 CNY
706,557
241
810,119
283
1,004,795
275
1,066,441
254
998,341
209
903,902
209
909,852
Source: China Customs, NDRC, EIA, RHB
Again the adjustment in city-gate prices is still a decision of the NDRC and not a
purely market-based mechanism. Hence, it is hard to make a definite judgement on
the timing of the next adjustment. The NDRC will also need to take into account the
impact of price adjustments on upstream natural gas producers and importers like
CNPC. We reckon that, if international oil prices stay at current levels until 2H15, we
may see an increasing chance of cuts in city-gate prices later this year.
Natural gas consumption to be stimulated. The intention of this round of
adjustments is to maintain the discount of natural gas alternative fuels. And we
expect users who are sensitive to energy costs will consume more natural gas after
they observe lower gas prices. In particular, those relatively new users will have more
incentives to use natural gas as they have high percentage of incremental volume
and can enjoy much lower prices. However, we should not overestimate the stimulus
to natural gas consumption, given that industrial activities remain relatively sluggish.
Market-based pricing for directly-supplied users. Another major policy change is
applied to those directly-supplied users who receive natural gas directly from
upstream producers and major pipeline operators. These users will be able to
negotiate pricing terms with their suppliers starting in April. There are concerns that
this may affect the operation of city gas distributors if users seek to obtain supplies
directly from major producers and pipeline operators. We see the threat of the new
policy is limited, given that the operating rights of the city gas distributors are
protected by law. It is also not easy to for upstream suppliers to supply gas directly to
users due to lack of pipeline infrastructure.
24

11 May 2015
Figure 34: Oil and natural gas prices
Figure 35: Domestic fuel prices
(USD/barrel)
120
(USD/MMBtu)
6.5
(CNY/tonne)
9,500
(CNY/tonne)
7000
3500
40
2.5
5,500
3000
WTI (LHS)
Jan-14
Jan-14
Brent (LHS)
Natural Gas Futures NYM (RHS)
Source: Bloomberg
Diesel Oil No 0 (LHS)
Gasoline No 93 (LHS)
Jan-15
6,000
Dec-14
Nov-14
50
Oct-14
4000
Sep-14
6,500
Aug-14
3.5
Jul-14
60
Jun-14
4500
May-14
5000
7,000
Apr-14
7,500
Mar-14
4.5
70
Feb-14
80
Jan-15
5500
Dec-14
8,000
Nov-14
Oct-14
90
Sep-14
6000
Aug-14
8,500
Jul-14
5.5
Jun-14
100
May-14
6500
Apr-14
9,000
Mar-14
Feb-14
110
LPG (RHS)
Source: NBS, Bloomberg
Impact on distributors. In theory, the gas price cut pass-through should be faster
and easier than a price hike, as it faces less resistance from end-users. However,
only a few provinces and cities like Tianjin, Shandong and Zhejiang have announced
pass-through plans. The overall speed of pass-through still largely depends on the
negotiations between distributors and local price bureaus. Distributors will have great
incentives to slow down the pass-through process. In practice, we expect there to be
a delay of 1-2 months before any full pass-through is seen. Dollar margin per unit of
gas sold of distributors should increase during the delay and their GPMs will also
benefit. Furthermore, if distributors can maintain their dollar margin after passthrough, we may see an expansion in gross margins and profit.
After all, lower end-user prices will provide incentives for users to consume more
natural gas. This is especially so for those relatively new subscribers as they have
more incremental volumes and can enjoy bigger effective reduction in prices. In an
environment of slower economic growth, lower natural gas costs means a great deal
to those industrial and commercial users.
Due to the difference in mix of incremental volume and existing volume, the scale
and impact of the city-gate price cut varies across distributors. In practise, it is difficult
to accurately calculate the ratio between incremental and existing volumes for
distributors as there are additions or disposals of projects. Additionally, city-gate
prices are also different across China. With the disclosed volume data, we estimated
the possible changes in gas prices for each distributor (see Figure 36 below).
Figure 36: City-gate price change estimates for selected distributors
Gas price
change estimate
Non-residential
volume mix
FY14 Natural gas sales volume
FY12 Natural gas sales volume
Incremental Existing Non-residential Residential
Total Non-residential Residential
(b cu m)
Company
Ticker
China Gas Holdings
384 HK
-3.8%
29%
71%
8.5
1.4
9.9
6.0
0.8
China Resources Gas
1193 HK
-4.3%
32%
68%
9.9
3.5
13.3
6.7
2.5
ENN Energy
2688 HK
-5.3%
38%
62%
8.9
1.2
10.1
5.5
0.9
Towngas China
1083 HK
-2.0%
19%
81%
4.9
1.6
6.5
4.0
1.3
Beijing Enterprises Holdings 392 HK
-2.1%
20%
80%
8.0
1.9
10.0
6.5
1.5
China total
-1.8%
18%
82%
142.9
35.7
178.6
117.5
28.8
Note: Data for CGH refers to FY15 and FY13

Source: Company data, NDRC, RHB
25

11 May 2015
Corporate Background
CGH is one of Chinas largest city gas distribution players with the highest number of
gas distribution concessions. Since its establishment in 2002, the company has
grown into a leading independent city gas distribution player in the country. As at
end-Mar 2014, CGH operates in 24 provinces in China with: i) 237 gas distribution
concessions, ii) 353 compressed natural gas (CNG) refilling stations, and III) 98 LPG
distribution projects. The length of intermediate and arterial gas pipeline networks
(excluding branch pipeline networks) owned by the company has reached 47,668 km.
CGH connected a total of 10,306,995 residential, and 62,193 industrial and
commercial users. During the year ended Mar 2014, the company sold a total of
8.17bcm of piped gas (including coal gas and piped LPG), representing 16.5% YoY
growth.
Figure 37: Natural gas and LPG projects location
Source: Company
CGHs major shareholders including its founder and president Mr Liu Ming Hui,
London-listed Fortune Oil (FTO LN, NR), state-owned BEH, South Korea-based gas
and power company SK E&S, and Indias major natural gas distributor GAIL India
(GAIL IN, NR).
Figure 38: Company shareholding structure
26

11 May 2015
Overview
CGHs revenue mainly comes from piped gas sales (42%) and LPG sales (43%).
However, in terms of operating profit, the biggest contribution is from gas connection
(50.6%) and piped gas sales (37.1%). LPG sales only accounted for 4.3% of total
operating income. We forecast for its gas sales volume to be close to 10bcm in FY15
and surpass 12bcm in FY16, representing YoY growth of 21% and 28% respectively.
Figure 39: CGH revenue breakdown FY14
Figure 40: CGH operating income breakdown FY14
Sales of coke
and gas
appliances
0.03%
Zhongyu Gas
3.0%
Sales of LPG
4.3%
Connection
f ees
14.8%
Sales of coke
and gas
appliances
-0.01%
Fortune Gas
5.1%
LPG sales
43.4%
Piped gas
sales
41.9%
Gas
connection
50.6%
Sales of piped
gas
37.1%
Figure 41: CGH natural gas sales volume breakdown
Figure 42: CGH piped gas sales volume breakdown FY14

Coal gas &
LPG
2%
(m cu m)
16,000
14,000
CNG/LNG
stations
9%
12,000
10,000
Residential
14%
Commercial
12%
8,000
6,000
4,000
2,000
Industrial
63%
FY12
Residential
FY13
FY14
Industrial
FY15F
Commercial
FY16F
FY17F
CNG/LNG stations
Figure 43: CGH revenue and growth
Figure 44: CGH recurring net profit and growth
(HKDm)
(YoY)
(HKDm)
60,000
50%
5,000
100%
4,500
90%
4,000
80%
3,500
70%
3,000
60%
2,500
50%
2,000
40%
1,500
30%
1,000
20%
500
10%
50,000
40%
40,000
30%
30,000
20%
20,000
10%
10,000
0%
-10%
FY12
FY13
FY14
Revenue (LHS)
FY15F
FY16F
Growh (RHS)
FY17F
(YoY)
0%
FY12
FY13
FY14
FY15F
Recurring net prof it (LHS)
FY16F
FY17F
Growh (RHS)
27

11 May 2015
Most Active Acquisition Player

Leading player with the most number of city
gas concessions among its peers
The largest city gas portfolio built by active acquisitions. CGH currently has the
largest business portfolio in the gas distribution sector. According to the company, its
current number of city gas concessions stands at 250 (including the projects of BGD).
Figure 45: City piped gas projects (exclusive concession rights)
300
250
200
150
100
50
0
FY08
FY09
CGH
FY10
CR Gas
FY11
ENN
FY12
FY13
Towngas China
FY14
Latest
China Oil & Gas
For gas distributors in China, geographic coverage and business portfolio size are of
great importance due to the regional monopoly nature of the sector. City gas
distributors are awarded exclusive operating rights by local governments through a
bidding system. Usually the operating rights have terms up to 30 years. Once an
operator becomes established in a city/region, it is almost impossible for other
competitors to enter the market in said area and the operator can enjoy long-term
stable and visible growth.
According to China Natural Gas Map, there are over 2,318 city gas exclusive
operating zones in China. Since the first open bidding for exclusive operating rights in
2002, many of the rights for the countrys major cities have been acquired. CR Gas
currently has the second-highest number of operating rights among its peers, ie a
market share of 8%.
28

11 May 2015
Figure 46: CGHs acquisition activities
Period
Acquired projects
FY10 (Apr09-Mar10)
50 city gas projects in 10 provinces: 5 in Liaoning; 2 in Heilongjiang; 1 in

Inner Mongolia; 1 in Jiangsu, 2 in Hunan, 1 in Jiangxi; 5 in Guangxi; 1 in Anhui
and 3 in Guangdong.
Acquired 49% equity in Fujian Anran Gas. and hence its 29 city piped gas
projects. This transaction expanded user base and sales volume in Fujiian.
FY11 (Apr10-Mar11)
28 city gas projects in 11 provinces including Gansu, Liaoning, Heilongjiang,

Guangdong, Guangxi, Jiangxi, Hubei, Hebei, Henan, Shandong and Anhui.
In March 2011, signed the agreement to acquire Panva Gas, the biggest LPG
downstream retailer in China, which owns 450 LPG retail and 220 franchised
class III stations and services more than 4m households in 8 provinces and
regions.
FY12 (Apr11-Mar12)
9 city gas projects: 1 in Liaoning, 1 in Heilongjiang, 1 in Hebei, 2 in Anhui,

and 4 in Henan.
FY13 (Apr12-Mar13)
22 city gas projects in Liaoning, Heilongjiang, Hubei, etc.
FY14 (Apr13-Mar14)
52 city gas projects in 19 provinces.

Completed the acquisition of 100% interest in Fortune Gas in Aug. 2013,
which owns 11 city concessions, 1 long distance pipeline and various patents
in LNG vessel engines and oil to gas conversion technology for vessels.
Completed the acquisition of 100% interest in Panva Gas in Aug. 2013 and
has become the largest LPG downstream retailer in China.
Latest (since Apr14)
6 new city gas projects (Apr - Sep 2014).

On 26 Nov. 2014, entered into the Acquisition Agreement with Beijing
Enterprises Holdings Ltd (BEH), to acquire the entire issued share capital of
Beijing Gas Development Limited (BGD), a wholly-owned subsidiary of BEH for
HKD2b. Assets to be acquired includes:
i) 12 gas projects in Liaoning, Hebei, Heilongjiang, Shandong, Anhui and
Hainan, total connectable urban population of 10,348,200 (approximately
2,900,000
households);
ii) 3 CNG & 1 LNG stations;
iii) Shandong long distance pipeline has 2 arterial pipelines and 11 branch
pipelines, designed length is 1,192 km and gas volume can reach 12.8 bcm.
Source: Company data
29

11 May 2015
BEHs Position In CGH To Strengthen After Acquisition

Leader in Chinas city gas distribution sector
Acquisition to enlarge coverage in North and North-East China. The acquiring of

BGD from CGHs substantial shareholder BEH is a major step in the alliance
between the latter two. The total consideration for the proposed acquisition is around
HKD2.06bn, which will be paid by the issuance of 149m new shares to the seller. The
assets to be acquired include 12 city gas project companies that are engaged in
piped city gas distribution, CNG and LNG station operations, as well as the
investment in construction and operating of long-distance pipelines. The principal
locations of the projects are in Liaoning, Hebei, Heilongjiang, Shandong, Anhui and
Hainan, which are mostly in North and North-East China. BGD has a total of 1.23m
installed users, including 1.22m residential users. It also has 1.06m connected gas
users, comprising 1.05m residential, 9,667 commercial and 282 industrial users. BGD
reported natural gas sales of 618m cu m in 2013. For the first five months of 2014,
aggregated natural gas sales amounted to 277m cu m.
Figure 47: BGDs 12 project companies

Project company
City gas Gas

vehicle
Long
distance
pipeline
Operation
since
Location
Total
assets*
(CNYm)
721,091
Net Seller
assets* interest
(CNYm)
(%)
383,332
100%
Beijing Gas Group Shandong Co., Ltd.
Late 1990s
Shandong
Tangsan Gas Group Co., Ltd.
1990s
Hebei
1,634,963
291,741
49%
2011
Shandong
906,237
197,389
22%
441,647
120,786
48%
63,820
42,115
100%
145,881
31,773
100%
106,328
26,457
36%*
36,600
25,411
70%
Shandong Province Natural Gas Pipeline Network Investment Co., Ltd.

PetroChina Beiran Jinzhou Gas Co., Ltd.
2010
Liaoning
Beijing Anhua Hengtai Investment Co., Ltd.
2009
Beijing
Hegang Juyuan Coalbed Methane Corporation, Ltd.
2007
Heilongjiang
Shandong Province Natural Gas Utilization Co., Ltd.
Jinzhou Beiran Vehicle Use Natural Gas Corporation, Ltd.
Not operating Shandong
2013
Liaoning
Beijing Gas Group Hainan Co., Ltd.
Not operating Hainan
19,954
19,913
100%
Beijing Gas Jinzhou Dayou Gas Co., Ltd.
2013
16,205
13,324
100%
Beijing Gas Group Qingan Co., Ltd.
Not operating Heilongjiang
9,586
9,571
100%
Yingkou Bohai Gas Development Co., Ltd.
Not operating Liaoning
8,765
4,470
51%
Liaoning
Total
4,111,075 1,166,283
Note: i) value as at 30 June 2014, "net assets" refer to the net assets attributable to the seller, ii) Shandong Province Natural Gas Utilization Co Ltd. Is 25% directly owned by
the target and 50% indirectly owned by the target through Shandong Province Natural Gas Pipeline Network Investment Co Ltd
Reasonable valuation with limited earnings contribution. The consideration for

the acquisition represents 1.4x P/BV based on the net asset value as at Jun 2014
and 17.8x P/E based on the annualised net profit after taxation for the first half of
2014. However, we see limited contribution to CGHs operations in the near term.
The sales volume of the target, BGD, in 2012, 2013 and 1H14 are around 7.6%,
7.6% and 6.6% of CGHs total sales volume in FY13, FY14 and 1HFY15 respectively.
At the same time, the net profit/loss after taxation of BGD in 2012, 2013 and 1H14
stands at about -0.8%, 0.5% and 2% of CGHs net profit after tax in FY13, FY14 and
1H15.
BEHs position in CGH strengthened after acquisition. BGDs assets are mostly
located in regions outside Beijing, in areas like Liaoning, Hebei and Heilongjiang. We
see these as the non-core operating areas of BEH, and some are still loss-making as
indicated in the acquisition circular. This acquisition exercise is basically equivalent to
an injection of BEHs non-core assets into CGH, and helps to effectively list these
assets in the market. Upon completion of the acquisition and issuance of the
consideration shares, BEHs shareholding in CGH will increase to 24.77% (from
22.52%) as indicated in the acquisition circular. Other major shareholders positions
are expected to weaken in the enlarged share capital. This will further strengthen
BEHs position as CGHs single-largest shareholder.
Figure 48: CGHs shareholding structure
BEH
As at the latest Immediately after the issue of

practicable date
the consideration shares
22.52%
24.77%
Mr. Liu Ming Hui*
20.69%*
20.10%*
Mr. Chiu Tat Jung Daniel (Fortune Oil)*
18.83%*
18.28%*
SK E&S
15.55%
15.10%
Other shareholders
37.10%
36.03%
Note: Includes the 14.88%/14.45% jointly held by Mr Liu Ming Hui and Mr Chiu Tat Jung Daniel
30

11 May 2015
Major Player In North And North-East China

Concentration of industrial cities in North and North-East China. Hebei,
Liaoning, Heilongjiang and Jilin are some of the most important industrial bases for
China. Due to the concentration of heavy industries in these regions, emission control
and pollution reduction are on top of the agenda for local governments there. The
Central Government has also published the Restructuring Plan on the Old National
Industrial Bases (2013-2022), a comprehensive plan for the development of these
industrial bases. One key mission set in the plan is to enhance energy saving and
emission reduction. As coal remains the most widely used fuel for heating and
industrial boilers, we see huge potential for natural gas consumption by industrial as
well as residential users there. Additionally, the upcoming Russia-China gas pipeline
should substantially improve the tight supply conditions in these regions.
Figure 49: Locations of old industrial bases in China
Source: Ministry of Industry and Information Technology (MIIT), RHB
In the past, due to supply constraints, North and North-East China had relatively
slower gas consumption growth and penetration ratios when compared to other
regions. For North-East China in particular, the slower adoption of natural gas was
due to a lack of major long-distance pipelines, with most of the supplies coming from
LNG imports. These are priced much higher than pipeline gas. The new wave of
supplies from Russia will help to ease shortage in these regions, boost natural gas
consumption and stabilise gas prices.
Large presence in North and North-East China. According to CGH, over 20% of its
250 projects are in North and North-East China. Currently the company owns around
15 projects in Liaoning, 16 in Heilongjiang, 21 in Hebei, 14 in Inner Mongolia and
several projects in Tianjin and Shanxi. Additionally, the majority of the projects in the
acquired portfolio from BEH are also located in North and North-East China. For
example, Tangshan (Hebei), Jinzhou (Liaoning) and Hegang (Heilongjiang) are all
key industrial bases in China with many energy-intensive industries. These areas
present huge potential demand for heating and coal to gas projects. The large
presence in North and North-East China ought to enable CGH to seize the
opportunity of: i) the switch from coal to gas for industrial boilers, ii) development of
gas-based urban district heating, and iii) the potential rise in supply through the
eastern route of the Russia-China gas pipeline.
31

11 May 2015
Figure 50: CGHs operating locations in Hebei, Liaoning, Jilin and Heilongjiang
Province
Location
Hebei
Cangzhou Development Zone
Urban Connectable Connected

population Residential
residential
(persons) Households households
270,000
84,375
4,032
Connected Connected
industrial commercail
users
users
27
9
40
760,000
52,000
16,000
28,440
16
Qinghe County
340,000
72,000
23,000
3,826
13
12
Wangdu city
230,000
32,000
10,000
15,973
20
117
110
Tangshan Nanbao
170,000
72,000
23,000
20,520
17
74
137
4,320,000
788,000
246,000
168,420
123
401
879
72
438
35
9,611
30
64
750,000
750,000
234,000
Cangzhou High-tech Zone
150,000
90,000
28,125
Tang County
515,000
310,000
96,875
Handan Jinan New Zone
918,000
70,000
21,875
Luquan
430,000
156,000
52,000
35,289
26
83
Quyang County
600,000
150,000
40,000
8,344
26
40
Raoyang County
300,000
67,000
20,938
Botou New Zone
830,000
380,000
118,750
2,260,000
1,415,000
442,000
279,119
10
6,148
429
80,000
80,000
25,000
43,045
161
105
Shenyang Sujiatun
430,000
430,000
112,000
45,538
20
302
309
Dailian Jinzhou Development Zone
830,000
450,000
140,625
39,788
30
159
1,824,000
716,000
223,750
81,993
38
276
598
Gaizhou
730,000
287,000
103,000
16,035
33
81
Zhuanghe
910,000
284,375
88,867
28,179
55
174
7,053
10
17
78
Fushun
Jinzhou Economic Hi-Tech Development Zone
Liaoyang
Zhuanghe Industrial Park

Pulandian
Liaoyang Economic Zone
97,000
69,000
21,563
830,000
300,000
93,750
86,848
63,200
19,750
Liaoyang Taizi River
120,000
65,000
20,313
Xinbin County
320,000
150,000
46,875
29,000
13,000
4,063
4,174
350,000
160,000
50,000
1,409
Jinzhou Longxiwan New Zone

Qingyuan County
Jianping County
Fushun County
20
-
Dashiqiao Industrial Park
Jilin
Pipelines
length (km)
Nanpi County
Leting County, Xinle, Gaocheng, Pingshan

County, Fengnan District of Tangshan, Neiqiu
County
Bohai New Zone
Liaoning
Total
population
(persons)
370,000
220,000
150,000
46,875
Yixian Qilihe
34,800
34,800
10,875
Fusong
43,000
22,000
6,875
1,794
10,000,000
5,000,000
1,562,000
1,413,094
81
8,403
2480
2,480,000
820,000
256,250
136,896
483
508
900,000
250,000
78,125
2,750,000
800,000
250,000
86,793
224
279
Jiagedaqi
550,000
160,000
50,000
5,285
37
Huachuan County
220,000
137,000
42,813
9,062
27
2,983
Tangyuan County
330,445
101,500
31,719
1,876
14
Huanan County
461,000
124,000
38,750
1,875
10
Suibin County
220,000
100,000
31,250
Tongjiang
210,000
90,000
28,125
70,000
70,000
21,875
Nongkenbaoquanling
209,700
150,000
46,875
Raohe County
150,000
85,000
26,563
14,000
14,000
4,375
Mu Lan County
262,000
120,000
37,500
Tieli Chengguan
198,000
198,000
56,571
Heilongjiang Harbin
Jiamusi
Shuangcheng
Mudanjiang
Mudanjiang Development Zone
Qitaihe Jinsha New Zone
2,020
Note: Data as at 31 Mar 2014

32

11 May 2015
Gas Station Expansion With Focus On CNG

Continued expansion in the gas station business. In 1HFY15, CGH added 55
new CNG and 26 LNG refilling stations for vehicles. At the end of Sep 2014, the
company had a total of 434 natural gas refilling stations (FY14: 353), including 350
CNG and 84 LNG refilling stations in 119 cities. CGHs target is to build 550 refilling
stations by the end of FY15, 750 stations by the end of FY16, and 1,000 stations by
the end of FY17. This expansion plan has received support from the Asian
Development Bank (ADB). In Dec 2014, the ADB agreed to lend USD450m to CGH
for the construction and operation of up to 600 CNG and 200 LNG refilling stations for
land transportation, and 20 LNG refilling stations for river vessels by 2018. Chinas
vast inland waterway transportation network represents a huge potential for natural
gas application for river vessels.
To focus on CNG stations. In China, the development of CNG vehicles has a longer
history. This is because the supply of CNG is more available than LNG, which mainly
relies on imports. According to China Automotive Engineering Research Institute, by
the end of Apr 2014, China had over 3m gas vehicles, with about 90% (2.7m) of them
CNG vehicles. The rest are LNG and LPG vehicles. In most cases, LNG is used for
heavy duty and long-distance vehicles while CNG is used for public transportation
and taxis. After 2012, as the LNG supply condition improved, the construction of LNG
refilling stations picked up. The number of such stations has risen to over 1,600 in
mid-2014 from less than 400 in 2012. Meanwhile, the number of CNG stations has
also increased to 3,700 in 2014 from about 2,400 in 2012. The drastic surge in LNG
stations has intensified competition, and reduced the profitability and utilisation rate
of LNG stations. This is because the number of LNG vehicles still lags their CNG
equivalents. Accordingly, CGH has adjusted its strategy to focus on the development
of CNG stations in the future. Its network of LNG stations will also be expanded, but
not as a priority. The company expects that, among its 1,000 refilling stations in 2017,
less than 15% may be LNG stations.
Figure 51: Number of CNG/LNG stations
Figure 52: CNG/LNG stations sales volume

(m cu m)
(YoY)
1,200
3,000
60%
1,000
2,500
50%
2,000
40%
1,500
30%
1,000
20%
500
10%
800
600
400
200
CNG
LNG
FY17F
FY16F
FY15F
1HFY15
FY14
FY13
FY12
FY11
FY10
FY09
0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15F FY16F FY17F
Sales of natural gas (LHS)
YoY (RHS)
33

11 May 2015
LPG Complementary To Piped Gas

The largest LPG distributor in China. According to CGH, it is the largest
downstream LPG distributor in China with eight LPG terminals, 98 LPG distribution
projects and 957 retail stores in 10 provinces, mainly in South China. The LPG
business was built up through two major acquisitions, one in 2008 (Zhejiang
Zhongyou Hua Dian Energy Co Ltd) and the other in 2012 (Panva Gas Holdings Ltd).
Both the acquired entities are top LPG trading and distribution players in China. The
rationale behind the acquisitions was to expand CGHs coverage to rural and
suburban areas where pipeline infrastructure was not in place and the supply of
piped gas could not reach customers there. A bottled LPG business helps to fill the
gap. CGHs LPG business now covers upstream importing, midstream distribution
and downstream retailing, forming a vertically-integrated operations model.
LPG complementary to pipe gas. Despite the rapid progress of urbanisation and
infrastructure development, there are still roughly two thirds of Chinas population that
has no access to any type of fuel gas. Coal and biomass, which emits more
pollutants, are their most feasible choices for cooking and heating. In these areas,
bottled LPG becomes the most readily accessible clean fuel for these users.
Additionally, LPG is widely used for various industrial purposes, including vehicle
fuel, metal cutting, smelting and petro-chemical production. In FY14, CGH sold
1.76m tonnes of LPG, and it is looking to further increase its LPG sales to 2.3m
tonnes and 3m tonnes in FY15 and FY16 respectively, to meet rising demand,
primarily from the petrochemical industry in China. With a wide range of applications,
we expect overall demand for LPG to be ample in the foreseeable future despite the
substitution threat from LNG and piped gas. However, due to its low margins, the
LPG business is likely to remain a laggard in profit contributions to CGH.
Gross margins improved due to expansion in retail business. The downstream
retail business entails much higher gross margins than the mid-upper stream
wholesale equivalent. This is because retail prices and customers are more stable.
Generally, gross margins of the retail business are above 10%, and can be as high
as 20%. However, gross margins of the mid-upper stream wholesale business are
only 5-7%. After the acquisition of Panva Gas in 2012, CGH was able to expand its
LPG retail business and successfully improved gross margin of its LPG segment to
5.8% and 6.7% in FY13 and FY14 respectively from 5.5% in FY12. The proportion of
retail sales in total LPG sales volume was up to 45% in FY14 from 24% in FY12. As
LPG prices have been falling in line with the drop in international oil prices, CGHs
LPG retail business may benefit while the wholesale business may have to bear the
impact of lower selling prices. According to CGH, contractual sales with stable pricing
accounted for more than 60% of the total LPG wholesale volume. This may help the
company to avoid some of the negative impacts caused by the volatility of LPG
prices. And the improvement in retail business may also offset some of the downside
risks related to its wholesale business.
Figure 53: Gross margin estimates along the LPG supply chain
Gross Margin (%) - assuming ex-factory
price of LPG at CNY4,100 per tonne
1%
(~CNY41 per tonne)
Bottled LPG
Maker
Class 3
Station
Class 2
Station
Wholesale
Class 1
Station Wholesale
Oil Refinery
4-7%
(~CNY215 per tonne)
Bottled LPG
Retailers
10-20%
(~CNY600 per tonne)
4-6%
(~CNY215 per tonne)
Source: RHB
Figure 54: Sales and profit of LPG segment
Figure 55: CGH's overall margins and LPG segment margins
(HKDm)
12,000
25.0%
10,000
20.0%
8,000
15.0%
6,000
10.0%
4,000
5.0%
2,000
0.0%
0
-2,000
FY09
FY10
FY11
LPG sales
FY12
FY13
FY14
Operating prof it
1HFY15
-5.0%
FY09
FY10
FY11
FY12
FY13
FY14
1HFY15
LPG gross margin
LPG operating margin
Overall gross margin
Overall operating margin
34

11 May 2015
Fortune Gas And Zhongyu Gas

Fortune Gas. The entire share capital of Fortune Gas Investment Holdings (Fortune
Gas) was acquired by CGH in 2013. Fortune Gas is mainly engaged in the
businesses of city gas distribution, gas refuelling stations, upstream CBM business,
LNG supply to public transit vehicles, and development of LNG dual fuel vessel
refuelling business along the Yangtze River. The companys city gas projects are
mainly located in Beijing, Tianjin, Hebei, Shanxi, Shandong, Henan and Liaoning.
Fortune Gas exploration and development of CBM is conducted through a product
sharing contract with a state-owned CBM investment company in relation to the CBM
project in Liulin County (Shanxi), which covers 184 sq km. The company has an
effective interest of 25% in the CBM project. Fortune Gas LNG vessel refuelling
business focuses on establishing refuelling stations in Chongqing, Hubei, Jiangsu,
Anhui and other provinces along the Yangtze waterway, inland rivers and lake area.
In FY14, the segment revenue of Fortune Gas amounted to HKD905m, accounting
for 3.5% of CGHs total revenue. The segment profit of Fortune Gas was HKD200m,
representing 5% of its parents total segment profit. In 1HFY15, revenue contribution
from Fortune Gas remained small at 4.7% of CGHs total revenue, but the formers
segment profit surged to HKD396m, accounting for 14.6% of the latters total
segment profit.
Figure 56: The location of Fortune Gas operations
Zhongyu Gas. Zhongyu Gas Holdings Ltd (Zhongyu Gas) (3633 HK, NR) is 44.04%
owned by CGH. In 2014, Zhongyu Gas secured 23 additional gas projects with
exclusive rights, bringing its total number of projects to 52, which cover a total
connectable urban population of 8.6m in Henan, Hebei, Jiangsu, Shandong, Jilin,
Fujian, Heilongjiang, Zhejiang, Anhui and Beijing. That same year, its accumulated
number of residential, commercial and industrial customers reached 981,468, 601
and 3,419 respectively. For the year ended 31 Dec 2014, Zhongyu Gas topline
amounted to HKD3.4bn, up 9% YoY, as sales of piped gas only rose 3.3% YoY to
HKD2.3bn and connection income fell 0.9% YoY to HKD613m. Gross profits
increased 14% YoY to HKD850m, with GPM of 24.9% (2013: 23.8%). The
improvement in gross margins was mainly due to a faster pass-through of a price
hike to end-users. Net profit jumped 23.7% YoY to HKD324m. For FY14 (Mar), the
segment profit of Zhongyu Gas was HKD116m/ This is accounted for only 3% of
CGHs total segment profit.
Figure 57: Zhongyu Gas major operations location (as of Jun 2014)
35

11 May 2015
On Track To Meet FY15 Targets

1HFY15 supported by strong gas sales and improved LPG business. 1HFY15
recurring net profit came in at HKD1.64bn, representing a 29.7% YoY increase.
Revenue reached HKD15.6bn, an increase of 49% YoY. The rise in topline and
bottomline were driven by: i) the 17.8% YoY increase in piped gas sales volume that
reached 4.2bn cu m; ii) strong LPG volume growth of 50% YoY to 1.15m tonnes; iii)
13%, 33% and 34% YoY increases in new residential, industrial and commercial
connections respectively; iv) significant improvement in the operating margins of its
LPG business to 2.5% in 1HFY15 from 0.3% in 1HFY14; and v) significant growth
(+999% YoY) in Fortune Gas segment profit to HKD396m from HKD36m in 1HFY14.
Among the 4.2bn cu m of piped gas sales, 2.9bn cu m (67%) was delivered by city
gas projects (+32% YoY). The rest was via long-distance pipelines. Sales of city gas
projects were supported by 18%, 35% and 28% YoY volume growth in sales to
residential, industrial and commercial users respectively.
On track to meet FY15 target. In 1HFY15, new connections of residential, industrial
and commercial users amounted to 958,548, 300 and 4,684 respectively. CGH also
added 55 new CNG and 26 LNG refilling stations. Natural gas volume for vehicles
accounted for 10.5% of the companys total natural gas volume, an increase of
approximately 40.3% YoY.
Besides the proposed acquisition of BGD slated for completion in 1HFY15 CGH
acquired six new city piped gas projects and one new long-distance natural gas
pipeline project in Hebei, Heilongjiang, Hunan and Jiangxi.
Management maintained its guidance for FY15 and FY16. Total piped gas volume
ought to reach 10bcm (FY15) and 12bcm (FY16) while new residential connections
may rise to 1.75m and 1.85m in FY15 and FY16 respectively. CGH also guided for
the number of CNG and LNG stations increasing to 550 and 750 respectively while
LPG sales volume may go up to 2.3m tonnes (FY15) and 3m tonnes (FY16). We
view the guidance as achievable and that CGH is on track to meet these targets.
Figure 58: CGHs FY15 and FY16 guidance
FYE March 31
1HFY14
Total piped gas volume (b cu m)
% of
FY14
44%
FY14
1HFY15
% of FY15 YoY FY16 YoY

FY15
(%)
(%)
42%
10 22%
12 20%
New residential connections (m)
0.85
51%
1.66
0.96
CNG/LNG stations
224
63%
353
434
79%
550
56%
750
36%
LPG sales (m tonne)
0.8
44%
1.8
1.2
50%
2.3
31%
3.0
30%
55% 1.75
5% 1.85
6%
36

11 May 2015
Management Background
Mr Zhou Si, 57, is currently the chairman of the company. Mr Zhou was appointed as
an executive director in Aug 2013. He is the vice chairman, executive director and
CEO of BEH. He is also vice chairman of Beijing Enterprises Group Co Ltd (BE
Group). Mr Zhou received a Bachelors Degree in Science (Physics) from Capital
Normal University in 1982, an MBA degree from Tsinghua University in 1998 and
possesses the title of Senior Economist. From 1984 to 2003, he worked with
Comprehensive Planning Department of the Urban Management Commission of
Beijing Municipality as chief officer, deputy director and director and later worked as
deputy director of Urban Management Commission of Beijing Municipality. He has
extensive experience in urban management, economics, finance and enterprise
management.
Mr Liu Ming Hui, 51, is currently the executive chairman, managing director and
president of the company. Mr Liu was appointed as non-executive director on 17 Aug
2012 and has been elected as an executive director of CGH in Sep 2012. He was a
non-executive director of the company from Apr 2002 to Jul 2002, an executive
director of CGH from Jul 2002 to Apr 2011 and the managing director of the company
from Jul 2002 to Jan 2011. Mr Liu graduated from Hebei Normal University in the
Faculty of Mathematics, and has substantial working experiences in the infrastructure
and energy industry in China. He is the founder of the company.
Mr Huang Yong, 51, is currently the executive president of CGH. Mr Huang was
appointed as an executive director of the company in Jun 2013. He is responsible for
the operational management of CGH. He is also the chairman of several subsidiaries
under the CGH group of companies and the director of Zhongran Investment Ltd.
Prior to joining the company, Mr Huang also worked at Shenzhen Nanyou (Holdings)
Ltd () and Asia Environmental Development Co Ltd (),
among others. He graduated from Wuhan University with a Masters Degree in Law,
and has extensive experience in legal affairs and corporate management.
Mr Zhu Weiwei, 41, is currently the vice president of CGH. Mr Zhu was appointed as
an executive director of the company in Sep 2002. He received his Masters Degree
in Finance from Zhong-nan University of Finance & Economics. Mr Zhu has
substantial experience in financing and project management.
Mr Ma Jinlong, 47, is currently the vice president of CGH. Mr Ma was appointed as
an executive director of the company in Sep 2002. He received his Degree in
Economics from Hebei University and EMBA from University of International
Business and Economics. He has substantial experiences in financial and business
operation management.
Mr Chen Xinguo, 46, is currently the vice president of CGH. Mr Chen was appointed
as an executive director of the company in Apr 2013. He is a senior economist, and
holds a Doctorate Degree of Economics from Renmin University of China. Mr Chen
joined BE Group from 2005 to 2009 as a deputy manager and a manager of the
strategic development department. He then joined BGH as a deputy general
manager. Mr Chen was an officer and a deputy commissioner of Beijing Planning
Committee (Development and Planning Committee) from 1994 to 2003.
Ms Li Ching, 56, is currently the director of a few subsidiaries of CGH, including
Fortune Gas. Ms LI was appointed as an executive director in Jan 2014 and has
been the executive director of Fortune Oil since 1998. The shares of Fortune Oil are
currently listed on the London Stock Exchange and she has been working in Fortune
Oil for more than 15 years. Prior to that, Ms LI worked in China North Industries Corp
for 15 years. She was in charge of the finance and audit departments. Ms Li received
a Bachelors Degree from School of Public Finance of Central University of Finance
and Economics in 1982. She has extensive experience in finance and enterprise
management.
Auditors
Deloitte Touche Tohmatsu has been the companys auditor since 2002.
37

11 May 2015
Financial Exhibits
Profit & Loss (HKDm)
Mar-13
Mar-14
Mar-15F
Mar-16F
Total turnover
17,956
26,008
33,799
41,880
52,805
Cost of sales
(14,180)
(20,722)
(27,112)
(33,911)
(43,243)
Gross profit
Gen & admin expenses
Selling expenses
Mar-17F
3,776
5,286
6,688
7,969
9,562
(1,127)
(1,200)
(1,453)
(1,801)
(2,271)
(871)
(1,132)
(1,361)
(1,716)
Operating profit
1,988
3,215
4,102
4,807
5,575
Operating EBITDA
2,591
3,964
5,087
6,117
7,248
(1,172)
(1,542)
Depreciation of fixed assets

Amortisation of intangible assets
Operating EBIT
(661)
(543)
(60)
(653)
(96)
(860)
(125)
(137)
(132)
1,988
3,215
4,102
4,807
5,575
Net income from investments
552
636
611
757
954
Other recurring income
368
349
439
523
528
Interest income
77
57
74
91
115
Interest expense
(691)
(615)
(812)
(916)
(986)
Other non-recurring income

Pre-tax profit
144
79
52
2,437
3,721
4,467
5,263
6,187
(1,361)
Taxation
(400)
(741)
(938)
(1,105)
Minority interests
(272)
(404)
(478)
(564)
(654)
Profit after tax & minorities
1,764
2,576
3,050
3,594
4,172
Reported net profit
1,764
2,576
3,050
3,594
4,172
Recurring net profit
1,644
2,512
3,009
3,594
4,172
Mar-13
Mar-14
Mar-15F
Mar-16F
Mar-17F
1,988
3,215
4,102
4,807
5,575
Depreciation & amortisation
603
749
985
1,309
1,673
Change in working capital
213
(350)
669
157
390
Cash flow (HKDm)

Operating profit
Other operating cash flow
1,123
985
492
523
528
Operating cash flow
3,927
4,599
6,248
6,797
8,166
Interest received
Interest paid
Tax paid
Cash flow from operations
Capex
Other investing cash flow
Cash flow from investing activities
Dividends paid
77
57
74
91
115
(691)
(615)
(812)
(916)
(986)
(938)
(1,105)
(1,361)
(416)
(657)
2,896
3,383
4,571
4,867
5,935
(1,765)
(5,935)
(5,231)
(4,777)
(5,016)
(810)
794
1,286
757
(5,141)
(3,945)
(4,020)
(4,062)
(605)
(736)
(865)
(350)
(579)
Proceeds from issue of shares
193
498
Increase in debt
(33)
4,730
700
2,325
Other financing cash flow
(786)
Cash flow from financing activities
(976)
Cash at beginning of period

Total cash generated
Forex effects
Implied cash at end of period
954
(2,576)
4,818
(655)
(423)
(0)
1,000
-
4,226
95
1,589
135
3,959
6,454
7,175
9,611
2,468
722
2,436
2,008
32
27
4,195
6,454
7,175
9,611
11,619
38

11 May 2015
Financial Exhibits
Balance Sheet (HKDm)
Mar-13
Mar-14
Mar-15F
Mar-16F
Mar-17F
4,499
6,705
7,426
9,862
11,870
952
1,207
1,560
1,858
2,369
Accounts receivable
3,347
4,737
6,156
7,627
9,472
Other current assets
555
1,284
724
735
750
9,354
13,932
15,865
20,082
24,461
Total cash and equivalents

Inventories
Total current assets

Total investments
6,275
7,249
7,334
7,334
7,334
14,868
19,006
22,443
26,004
29,437
1,752
4,322
5,126
5,033
4,943
247
756
Total non-current assets
23,141
31,332
34,903
38,371
41,714
Total assets
66,175
Tangible fixed assets

Intangible assets
Total other assets
32,495
45,265
50,769
58,453
Short-term debt
8,445
5,761
5,261
7,586
7,586
Accounts payable
4,148
6,079
8,096
10,034
12,795
Other current liabilities

Total current liabilities
Total long-term debt
Other liabilities
Total non-current liabilities
Total liabilities
Share capital
Retained earnings reserve
Other reserves
Shareholders' equity
Minority interests
424
444
307
307
307
13,017
12,284
13,664
17,927
20,688
6,356
14,192
15,392
15,392
16,392
379
631
631
631
631
6,735
14,824
16,024
16,024
17,024
19,752
27,108
29,688
33,951
37,712
46
50
50
50
50
8,652
12,867
15,312
18,170
21,477
2,787
2,867
2,867
2,867
2,867
11,485
15,783
18,229
21,087
24,394
1,258
2,374
2,852
3,415
4,069
Total equity
12,743
18,157
21,080
24,502
28,463
Total liabilities & equity
32,495
45,265
50,769
58,453
66,175
Mar-13
Mar-14
Mar-15F
Mar-16F
Mar-17F
(5.2)
44.8
30.0
23.9
26.1
2.8
61.7
27.6
17.2
16.0
Net profit growth (%)
84.9
46.0
18.4
17.8
16.1
EPS growth (%)
81.1
36.6
13.3
16.0
14.4
BVPS growth (%)
13.1
25.7
15.3
12.3
15.7
Operating margin (%)
11.1
12.4
12.1
11.5
10.6
Net profit margin (%)
9.8
9.9
9.0
8.6
7.9
Return on average assets (%)
5.5
6.6
6.4
6.6
6.7
Return on average equity (%)
16.6
18.9
17.9
18.3
18.3
Net debt to equity (%)
80.8
73.0
62.7
53.5
42.5
DPS
0.06
0.08
0.10
0.11
0.13
Recurrent cash flow per share
0.65
0.71
0.91
0.96
1.15
Key Ratios (HKD)

Revenue growth (%)
Operating profit growth (%)
39

11 May 2015
SWOT Analysis
CGHs future is tied up with Chinas shift
Leading player with the most number of projects
towards cleaner fuels like natural gas
Slower growth
in natural gas
consumption
amid low prices
of alternative
fuels like coal
and diesel
Wide coverage in North and North-East China market

Strategic alliance with Beijing Enterprises Holdings
(BEH) to support future expansion
Number of
available
acquisition
targets is falling,
especially those
in bigger cities
with high quality
Chinas policy
support for
natural gas
consumption
Coal to gas
switch projects
Demand for
bottled liquefied
petroleum gas
(LPG) in remote
areas without
major pipeline
infrastructure
Margin remains low at its LPG segment

Low proportion of connection fee income with higher
gross margins
P/E (x) vs EPS growth
P/BV (x) vs ROAE
34%
10
23%
11%
0%
Jan-15
P/E (x) (lhs)
EPS growth (rhs)
4.0
13.3%
3.0
10.0%
2.0
6.7%
1.0
3.3%
0.0
0.0%
P/B (x) (lhs)
Jan-17
45%
15
16.7%
Jan-16
20
5.0
Jan-15
56%
20.0%
Jan-14
25
6.0
Jan-13
68%
Jan-17
30
Jan-16
79%
Jan-14
90%
35
Jan-13
40
Return on average equity (rhs)
Company Profile
China Gas Holdings Limited is primarily engaged in the construction and operation of city gas pipelines, and transmission of natural gas
and sale of liquefied petroleum gas (LPG) to residential, industrial and commercial users in China. As of 31 March 2014, China Gas
owns 237 city gas projects, the largest portfolio in China, and its annual piped gas sales volume was 8.17 billion cubic meters.
40

11 May 2015
Recommendation Chart
Price Close
18
16
14
12
10
8
6
4
2
0
May-10
Aug-11
Nov-12
Feb-14
Source: RHB, Bloomberg

Date
Recommendation
Target Price
Price
2015-05-08
Source : RHB, Bloomberg
41
RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
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any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1%
or more in the securities covered in this report) that may create a potential conflict of interest, except for:
(a)
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in respect of which are reviewed in the report, and such interests aggregate to an amount equal to or more than (a) 1% of the subject companys market
capitalization (in the case of an issuer as defined under paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the Securities
and Futures Commission (the Code of Conduct); and/or (b) an amount equal to or more than 1% of the subject companys issued share capital, or issued
units, as applicable (in the case of a new listing applicant as defined in the Code of Conduct). Further, the analysts named in this report or their associates
may have financial interests in relation to an issuer or a new listing applicant (as the case may be) in the securities which are reviewed in the report.
RHBSHK or any of its group companies may make a market in the securities covered by this report.
RHBSHK or any of its group companies may have analysts or their associates, individual(s) employed by or associated with RHBSHK or any of its group
companies serving as an officer of the company or any of the companies covered by this report.
RHBSHK or any of its group companies may have received compensation or a mandate for investment banking services to the company or any of the
companies covered by this report within the past 12 months.
Note: The reference to group companies above refers to a group company of RHBSHK that carries on a business in Hong Kong in (a) investment
banking; (b) proprietary trading or market making; or (c) agency broking, in relation to securities listed or traded on The Stock Exchange of Hong Kong
Limited.
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RHB OSK Securities Hong Kong Ltd.

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RHB Research Institute Singapore

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Jakarta
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RHB OSK (China) Investment Advisory Co. Ltd.

Suite 4005, CITIC Square
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RHB OSK Indochina Securities Limited

No. 1-3, Street 271
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Fax: +(855) 23 969 171
Bangkok
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Initiating Coverage, 11 May 2015

China Gas Holdings (384 HK)

Energy & Petrochemicals - Oil & Gas Services

For a Cleaner Sky

China Gas Holdings (384 HK)

Relative to Hang Seng Index (RHS)

Avg Turnover (HKD/USD)

Beijing Enterprises Holdings

Share Performance (%)

Charles Zhang +852 2103 5842

Strengthened efforts to fight pollution and emissions. The Chinese

Forecasts and Valuations

Total turnover (HKDm)

Reported net profit (HKDm)

Recurring net profit (HKDm)

Recurring net profit growth (%)

Recurring EPS (HKD)

Recurring P/E (x)

Return on average equity (%)

Net debt to equity (%)

Dividend Yield (%)

Our vs consensus EPS (adjusted) (%)

See important disclosures at the end of this report

Source: Company data, RHB

Powered by EFATM Platform

China Gas Holdings (384 HK)

See important disclosures at the end of this report

China Gas Holdings (384 HK)

Government efforts to fight air pollution are

Upcoming gas inflows to support large scale

CGH is a major beneficiary of the grand

Gas price cut a positive move for natural gas

Lower city-gate gas prices may benefit

See important disclosures at the end of this report

China Gas Holdings (384 HK)

Strategic alliance with BEH gives CGH

See important disclosures at the end of this report

China Gas Holdings (384 HK)

Depreciation & amortisation

Change in working capital

Terminal Cash flow

PV of Terminal Cash flow

Figure 2: DCF variables and fair value

Figure 3: DCF sensitivity

Fair value (HKDm, unless specified)

SUMPV of cash flows

PV of terminal cash flow

Less: Minority interest

Add: Associates & JVs

Terminal growth rate

No. of shares (m)

Fair value per share (HKD)

9.80 10.20 10.65 11.15 11.72 12.37 13.12 14.00

China Gas Holdings (384 HK)

Figure 5: CGHs forward P/E band

Share Price (HKD)

Source: Bloomberg, RHB

See important disclosures at the end of this report

China Gas Holdings (384 HK)

Price Mkt cap 3-mth avg

EPS YoY (%) 3-Yr EPS

Adjusted sector avg*