We attended a reverse roadshow held by PetroChina (857:HK – N-R) in Xinjiang Province last week. Weexpect gas demand to remain strong and believe limited piped gas supply will lead to higher liquefiednatural gas (LNG) price and volume in the coming winter heating season and in
During the 19th National Congress of the Communist Party, Minister of Housing Wang Menghui called forreinforcement of the joint ownership housing pilot programme in Beijing and Shanghai and acceleratingdevelopment of China’s home rental market. In the long run, we expect to see the emergence of a threeprongedhousing scheme in higher-tier cities, with rental housing mainly targeting low-incomeresidents, joint ownership housing aiming at middle-income residents, and private housing for higherincomeresidents. However, we believe it will take over two years for the scheme to be implemented andthus do not expect policy tightening to ease in the near future.
- We note investorconcerns about a potential margin squeeze for gas distributors. However, we think increasing LNG prices willease competition on piped gas. Given our expectation of stronger gas sales in 4Q17E and the potential forhigher gas sales margin in 4Q17E and 18E, we remain Overweight.
New policy. Beijing had already published management guidelines for joint ownership housing prior tothe National Congress, in end-September
Strong gas demand. We note 1H17 interim earnings of downstream gas distributors are largely in line withmarket expectations as higher-than-expected gas sales have offset lower-than-expected gas sales margins.
- On the same day, it allocated 427 units of the first jointownership housing project among 12,000 eligible families through a lottery system. Earlier in 2013, thegovernment introduced self-occupied housing in the form of low-rent housing, economy housing, andprice-capped housing. Self-occupied housing was priced c.30% lower than the market price, with thepossibility to resell on the open market after a five-year holding period, subject to the payment of 30%capital return to the local government. Starting from October, joint ownership housing will replace selfoccupiedhousing as a key part of Beijing’s public housing system to support residents who are not homeowners. Ownership will be shared with the government, its stake depending on how much lower to themarket price the selling price will be.
ENN Energy (2688:HK – BUY) recorded the highest retail gas sales growth among peers in 1H17, at 26.8%YoY (residential: +25% YoY; commercial & industrial: +34% YoY), while China Resources Gas (1193:HK – N-R)reported a 22% YoY growth (residential: +12% YoY; commercial & industrial: +29% YoY) and Towngas China(1083:HK – N-R) an 18% YoY expansion (industrial: +23% YoY; commercial: +19%). According to gasdistributors, the strong commercial & industrial gas demand was mainly due to coal-to-gas conversions andChina’s economic recovery. According to the National Development and Reform Commission (NDRC), China’sapparent gas consumption grew 30.4% YoY in August 2017, at a significantly higher pace than in 1H17(+15.2% YoY). Given stronger-than-expected gas sales due to coal-to-gas conversions in northern China andcoastal provinces, and the relatively stable economic growth outlook, we expect China’s gas sales growth toreach 25% YoY in 2H17E, leading to +20% YoY in 17E and +15% YoY in 18E.
Global examples. The first joint ownership housing plan was launched in the UK in 1980, in a bid toease government expenditure on public housing construction without reducing supply. Home buyers’stake would reach 25-75%. In 1995, when housing prices hit a new high, Singapore introducedexecutive condos (ECs) to help Singaporean citizens who were not qualified for housing developmentboard (HDB) flats to buy residential properties with 20-30% discount to market prices. By contrast,Hong Kong’s public housing scheme is based on both public rental housing (PRH) and home ownershipscheme (HOS) flats.
Limited margin pressure. ENN Energy’s gas sales margin fell to Rmb0.66/m3 in 1H17 (vs Rmb0.74/m3 in1H16), while China Resources Gas’ dropped to Rmb0.64/m3 (vs Rmb0.75/m3 in 1H16). We note investorconcerns about further gas sales margin pressure, as a result of increasing competition in point-to-point LNGsupply and direct-gas sales. In contrast to market consensus, we see limited potential for further marginsqueeze in point-to-point gas supply in 17-18E, as the average commercial & industrial retail gas price ofRmb2.70/m3 is only 7% higher than the current LNG price. We also see little incentive for end-consumers toswitch from piped gas to LNG, with LNG less than Rmb0.30/m3 cheaper than piped gas.
Smooth transition. Since 2013, only 36,000 self-occupied housing units have been sold on the marketwith stable prices, while the contraction of total land supply in Beijing has led to a sharp decrease ofland parcels available for self-occupied housing. Beijing authorities revised up full-year 2017 landsupply in March and doubled residential land supply to 1,200ha, with self-occupied housing landincreasing from 83ha to 200ha (c.16 times the supply in 2016). We forecast limited change in landprices and buyers’ sentiment during the transition towards joint ownership housing, as they will stillbenefit from potential capital gains. In addition, we note the government will enjoy increased pricingflexibly by varying its stake in jointly owned properties.
Potential winter gas shortage. Given the upcoming potential winter gas shortage, following the increasedgas demand from coal-to-gas conversion and limited upstream piped gas supply, we expect PetroChina toraise by 10-15% its benchmark non-residential city-gate price, prior to the upcoming winter. We note theprice of LNG rallied by Rmb390/t to Rmb3,519/t in September (vs Rmb2,820/t in September 2016 andRmb3,030/t in 16A), as a result of the recent LNG supply shortage. With the potential winter gas shortage,we expect average LNG price to remain high at Rmb4,500-5,000/t in 4Q17E and Rmb4200/t in 18E,benefiting upstream LNG suppliers, such as PetroChina, CNOOC, Sinopec, Kunlun Energy (135:HK – N-R), andENN Energy, which signed overseas LNG supply contracts for 1.4mt at an all-in cost of Rmb2,200-2,400/t (itsZhoushan LNG terminal project is scheduled to commence operation in June 2018). However, we areconcerned about the profitability of residential gas sales in rural areas, due to higher gas costs as we expect60-70% of the supply for winter heating to rely on LNG. According to our sensitivity analysis, for every pricehike of Rmb100/t of LNG, China Gas (384:HK – Outperform) will see its FY18E EPS reduced by 0.7%.
Supply shortage. Official statistics show that Beijing’s resident population amounts to 22m, with anannual increase of c.500,000 on average over the past 20 years, moderating to c.300,000 over the lastfive years, although the actual data may be higher. However, following the sharp decrease in landsupply, newly built sellable housing only amounted to c.100,000 units every year over the past threeyears. Meanwhile, existing residential housing reaches c.7.6m units, of which 60% were built before the1998 private housing reform, which intensified upgrading needs.
Remain Overweight. Given expected strong gas sales in 17-18E (two-year Cagr of 18%) and limited marginpressure, we think the sector’s average valuation of 14x 18E PE remains attractive. Thus, we remainOverweight the sector. Our top pick is ENN Energy, given its strong earnings growth (15%) and attractivevaluation of 13x 18E PE. By contrast, we remain cautious on China Gas given the increasing margin pressureon rural residential gas sales and its relatively high valuation of 17x 18E PE.
Five-year plan. According to its five-year plan, Beijing will add 500,000 units of rental housing and 1munits of sellable housing in 2017-2021, of which commodity housing, joint ownership housing, andresettlement housing will account for 500,000, 250,000, and 250,000 units, respectively. If the plan iseffectively implemented, we expect demand for residential housing to be fulfilled, thus easing theupward pressure on housing prices. However, we note market concerns about the actual land supplyrate in 2017-2021, as it recorded 47% on average over the past three years. We believe home buyers’demand for private housing stemming from upgrading needs will sustain, especially for mid-range tohigh-end residential housing. We do not think the current supply shortage can be solved in the nearfuture, and believe current austerity measures are unlikely to be removed. We think the governmentwill continue to restrict private housing prices in Beijing.