GAS SECTOR：POLICY UPDATE DAMPENS CONCERNS OVER COAL-TO-GAS DIRECTION

Policy update on coal-to-gas target: To convert 2.7mn residential households, increased from 1.9mn last year

    Trend increase in government subsidies expanding city coverage

    Overweight: Buy China Gas, key beneficiary of coal-to-gas

    Coal-to-gas conversion further expands in 2+26 cities

    Ministry of Environment and Ecology has published a consultation paper “京

    津冀及周边地区2019-2020年秋冬季大气污染综合治理攻坚行动方案” (link) recently to set up targets for tackling the air pollution issues among the 2+26 cities in Beijing-Tianjin-Hebei and their surrounding areas for this winter. Government’s determination to convert away from coal remains intact including coal-to-electricity, or coal-to-gas. It plans to 1) convert 4.9mn (vs 3.6mn from last year’s target) coal-heating residential households, in which coal-to-gas conversion still accounted for ~55% (vs ~53% from last year’s target); 2) eliminate all small sized coal-fired heaters in the administrative areas of the 2+26 cities. Industrial sector will continue to be the key contributor for coal reduction in heating. According to “2019中国散煤综合治 理调研报告”, out of the 61mn ton of coal reduction in heating in 2018, industrial users accounted for 72%. Overall, the coal-replacement conversion in Beijing-Tianjin-Hebei and surrounding areas, and Fen-Wei Plain was a success in 2018 and exceeded target by 40%.

    Trend increase in subsidies with expanding city coverage

    To support coal replacement, central government’s subsidies increase from RMB6bn in 2017 to estimated RMB15.2bn in 2019. Also, the coverage cities for government subsidies have been expanded from initially 12 in 2016 to 43 in 2019. We estimate the 2017 and 2018 coal-to-gas initiative can bring in around 8bn cu m (accounting for 2.6% of total gas consumption for 2019E) of incremental gas consumption for the 2+26 cities during this coming heating season. Going forward, with the residential subsidies for the first batch of key cities will expire after this year’s heating period, we believe the government will adjust its subsidy policy according to each region’s own economic status, e.g. provide extension period for less affluent regions, rather than a hard cut-off.

    Overweight: China Gas is key play for coal-to-gas

    Reiterate overweight, expect volume driven growth with improving gas supply this winter supported by commencement of Russian gas transmission. BUY on China Gas (384 HK, TP: HK$38.3): Beneficiary of its large exposure in the North Eastern region with massive gas consumption growth potential. We also like ENN Energy (2688 HK, TP: HK$95) for its aggressive expansion into the integrated energy segment.