(Report Producer/Author: Soochow Securities, Yuan Li, Gu Yue)
1. Drivers of price reform
Motivation 1 for price reform: the return of resource value
In the long run, U.S. domestic gas prices have significantly outperformed the CPI by 0.26 pct, and China's gas prices have significantly underperformed the CPI by 0.22 pct since 2013.
From 2021 to 2022, overseas gas prices will rise, which will be transmitted to China, and the cost of domestic gas sources will rise. Since the fourth quarter of 2021, foreign gas prices have fluctuated sharply under the influence of the mismatch between supply and demand caused by the epidemic and the conflict between Russia and Ukraine. In 2023, as Europe takes the initiative to reduce consumption, gas storage is nearing the end, and increases imports from other regions, European natural gas prices will be basically digested by the impact of the Russia-Ukraine conflict, and gas prices will fall.
From 2021 to 2022, overseas gas prices will rise, which will be transmitted to China, and the cost of domestic gas sources will rise; In 2023, domestic gas prices will increase, and upstream profits will be straightened out. The average cost of natural gas in PetroChina can represent the overall domestic natural gas cost level, and the cost will continue to rise from 2020 to 2022. From 2018 to 2023, PetroChina's production and consumption accounted for 50-60% of the overall domestic natural gas production and consumption, and PetroChina's natural gas operation represents the state of China's natural gas market to a certain extent. From 2020 to 2022, the selling price of PetroChina continued to increase, with the average selling price increasing from 1.49 yuan/m3 in 2020 to 1.99 yuan/m3 in 2022, while the cost increased by a larger margin, resulting in a narrowing of the average operating profit, which decreased by 83% from 0.29 yuan/m3 in 2020 to 0.05 yuan/m3 in 2022. PetroChina's newly signed contract gas prices will rise in 2023, showing a trend of volume pressure + price increase, and PetroChina's unilateral operating profit will be restored in 2023. Since the beginning of 2023, natural gas prices have generally declined, import prices have fallen, and the cost pressure on the gas source side has eased. PetroChina's gas sales price has been increased since April 2023 through the contract plan, and the average gas price sold in 2023 has increased by 0.06 yuan/m3 compared with the whole year of 2022; The average operating profit of gas sales in 2023 will be 0.16 yuan/square, a year-on-year increase of +0.11 yuan/square, and profitability will be restored. The average gas-to-oil ratio (the ratio of unit calorific value to price of JKM to Brent) in January ~ April 2024 is 0.67, down 48% from the average value of 1.29 in 21-23, and the decline in gas prices is expected to promote long-term demand growth.
Motivation 2 for price reform: There is a cross-subsidy problem
The United States has achieved higher civilian prices, and domestic cross-subsidies need to be resolved. As the world's largest natural gas consumer and producer, the United States has a high self-sufficiency rate of natural gas and the most complete market mechanism. The order of gas prices in the United States is residential> commercial > industrial; In terms of scale effect, the price of residential gas in the United States is 2.8 times that of industrial gas. The mainland's residential prices are low, and the problem of cross-subsidy needs to be resolved. Residential gas accounts for less than 20% of the mainland's overall consumption, but the price of gas is significantly lower than that of industrial gas, which accounts for 71% of gas consumption. For the sake of people's livelihood protection, the current civil gas price is low, and the problem of cross-subsidy needs to be solved.
2. The impact of price reforms
The stable profit mechanism ensures the certainty of investment returns and promotes the release of 1.8 times the gas volume
Procurement costs: PetroChina's pipeline gas pricing will be stable in 2024, and considering the downward market price, the city gas company is expected to benefit from the cost reduction.
The proportion of residential gas volume and non-residential gas is on the same track, the proportion of controlled gas decreases, and the proportion of non-regulated gas increases. There are four important changes in this contract: 1) Residential and non-resident gas volume merger. In this pricing plan, the separate pricing of residential natural gas has been abolished, and the price of regulated gas will be uniformly increased by 18.5%, and in the 2023 pricing plan, the price of regulated gas for residential/non-residential use will be increased by 15%/20%. 2) The proportion of regulated gas decreased, while the proportion of unregulated gas increased. The proportion of off-season controlled gas in the total contract volume decreased from 70% to 65%. The proportion of unregulated gas in total contracts increased from 27% to 32%. 3) Inland unregulated gas price reduction. The price of inland unregulated gas increased by 70% on the basis of gate stations, a decrease of 10% compared with the previous year. 4) 3% was originally linked to JKM, but now it is linked to the monthly average CIF price of imported spot LNG released by the Shanghai Petroleum and Natural Gas Trading Center. PetroChina's focus on the domestic natural gas price index has increased.
Regardless of the 3% market-based linkage ratio, the procurement cost of urban fuel in 2024 will be comparable to that in 2023; Considering the 3% linked to the market price, it is expected that the market price will fall in 2024, and the city gas company is expected to benefit from the cost decline. 1) Regardless of the market-linked ratio of 3%, the price increase in the off-season, the price reduction in the peak season, the price reduction in the inland area, and the price increase in the coastal area, the overall procurement cost of urban gas in 2024 will be the same as that in 2023, all of which will be 2.42 yuan/square. According to the proportion of residential gas consumption of 20% (referring to the proportion of residential gas consumption of the five leading urban gas), the weighted average gate station price of 1.746 yuan/square meter (calculating the average price of each province, weighted by using the gas consumption of each province in 2021), the proportion of gas consumption in the off-season is 56% (the proportion of gas consumption in 2022.4-2022.10 accounts for 2022.4-2023.3), and the proportion of gas consumption in coastal provinces is 51% (the proportion of gas consumption in 11 coastal provinces in 2021). In the off-season of 2024, the price will increase by 0.03 yuan/square from 2.35 yuan/square in 2023 to 2.38 yuan/square, the price in the peak season will be reduced by 0.04 yuan/square from 2.51 yuan/square in 2023 to 2.47 yuan/square, the inland price will be reduced by 0.03 yuan/square from 2.42 yuan/square in 2023 to 2.39 yuan/square, and the coastal price will increase by 0.03 yuan/square to 2.45 yuan/square from 2.42 yuan/square in 2023. 2) Considering the 3% linked to the market price, under the current situation of the market price decline in 2024, the city gas company is expected to benefit from the cost decline. On March 15, 2024, the CIF price of HH/EU TTF/JKM in East Asia and China LNG ex-factory in China was -30.4%/-33.0%/-37.1%/-18.8%/-34.0% year-on-year to 0.4/2.2/2.2/2.9/2.2 yuan/square.
Sales price: The price difference is repaired along the price gradually. In April 2022~2024, a total of 138 cities (accounting for 48%) at and above the prefecture level across the country have carried out the price of residential gas, with a price increase of 0.21 yuan per square meter. China has been promoting the reform of the natural gas market, and it was in the exploratory stage from 2007 to 2016; Since 2017, the upstream and downstream linkage mechanism of non-residential gas consumption has been accelerated, and the price linkage of residential gas consumption has been relatively restrained. From 2023 onwards, the mainland will increase its efforts to promote the implementation of the upstream and downstream linkage mechanism for residents, and the linkage mechanism will be more perfect. In April 2022~2024, a total of 138 cities (accounting for 48%) at and above the prefecture level across the country have carried out residential gas prices, with a price increase of 0.21 yuan per square meter.
The improvement of the linkage mechanism is mainly reflected in the expansion of the scope of linkage, the shortening of the linkage cycle, the linkage formula linked price from the door price to the comprehensive purchase price, and the simplification of the linkage procedure. In June 2023, Hubei Province issued a complete policy document on natural gas price linkage, "Notice of the National Development and Reform Commission on Establishing and Improving the Upstream and Downstream Price Linkage Mechanism of Natural Gas". Linkage cycle: non-residential gas consumption is linked quarterly/monthly (the old policy is adjusted three times a year, respectively in the peak season, off-season and flat season); In principle, the linkage period of non-residential gas consumption shall not exceed one year. Linkage formula: The linkage price changes from the gate price to the purchase price, and retrospective adjustment is still allowed. Linkage procedure: Simplify the hearing procedure, and when a specific price level is formulated according to the linkage mechanism that has already taken effect, the pricing hearing may no longer be carried out, and the price authority may directly adjust the sales price.
The leading city gas generally does not reach the 7% rate of return stipulated in the policy, and there is room for improvement in the gas distribution fee, which is estimated to be more than 0.6 yuan / square, and the price difference has 20% room for improvement. In 2017, the National Development and Reform Commission issued a notice on the "Guiding Opinions on Strengthening the Supervision of Gas Distribution Prices", which stipulates that when approving the price of urban gas distribution, it shall be calculated according to the internal rate of return after tax of the whole investment not exceeding 7%. Judging from the ROA data of the five leading companies, only ENN Energy and China Gas have reached this standard, and the industry price spread will weaken in 2022, and the ROA will generally fall below 7%. Therefore, we judge that under the guidance of the yield standard, the price spread of each city gas company will increase, and the corresponding ROA will be further improved. We refer to the acquisition plan of a listed company's urban gas project to estimate that the reasonable gas distribution fee of the urban gas project exceeds 0.6 yuan per square meter, and increases with the increase of the purchase price.
The energy structure has improved, and the demand for natural gas has increased steadily. In December, the State Council issued the Action Plan for Continuous Improvement of Air Quality, emphasizing the need to ensure the production and supply of natural gas and the sustainable development of the industry. In December 2016, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) issued the "Energy Production and Consumption Revolution Strategy (2016-2030)", which mentioned that natural gas will account for about 15% of total energy consumption by 2030. In December 2023, the State Council issued the Action Plan for Continuous Improvement of Air Quality, which mentioned that it will continue to increase the production and supply of natural gas, give priority to ensuring the needs of residents and clean heating, and actively and steadily promote the replacement of coal with gas. Further emphasize the position of natural gas in the energy structure, and natural gas has good development prospects under favorable policies. According to the forecast of China's Energy Demand Forecast and Transformation Development Trend under the Vision of Carbon Peak and Carbon Neutrality, the primary energy consumption of the mainland will peak around 2030, with a peak of about 60.1×108t standard coal; Carbon emissions will peak around 2025, with a peak of about 107×108t; In 2030, the proportion of natural gas in the energy mix will be 15.0%. According to the conversion of 100 million tons of standard coal corresponding to 79.9 billion cubic meters of natural gas, natural gas consumption in 2030 will be 720.3 billion cubic meters, and the compound growth rate of natural gas consumption from 2023 to 2030 will be 9.0%, and the industry will continue to grow. The Plan emphasizes the rationalization of the price mechanism to ensure the orderly development of the industry. The plan mentions that the level of urban gas transmission and distribution should be reduced, the price of gas transmission and distribution should be reasonably formulated and strictly supervised, the linkage mechanism between terminal sales price and procurement price should be established and improved, and the clean heating price policy should be implemented.
Drive the revaluation of cash flow value, and there is room for improvement in valuation
Cash flow continues to be good and will improve in 2023, and there is room for dividend improvement. Cash flow performance was good, with free cash flow continuing to be positive. In 2023, the net cash flow from operating activities of the gas segment will be 81.9 billion yuan, an increase of 14.0% year-on-year; The net cash ratio was 1.60, -0.01 year-on-year, cash performance was good, and capital expenditure was 57.6 billion yuan, an increase of 9.8% year-on-year. From 2016 to 2023, the free cash flow of the sector continued to be positive. There is room for improvement in dividends. From 2021 to 2023, the free cash flow of the gas sector accounted for 55.8% of the net profit attributable to the parent company; From 2021 to 2023, the dividend rate of the board will be 42.7%, and there is still room for improvement of the dividend rate of 13.1pct on the basis of steady development. In the future, the dividend ability will be further improved by promoting profit improvement and capital expenditure reduction (only pipeline maintenance expenditure) will be carried out at a favorable price.
Compared with the hydropower faucet Yangtze River Power, the PB-ROE ratio of the gas faucet is low, and there is room for improvement in valuation. The cash flow of Yangtze Power and gas faucets is generally good, and the cash flow of gas faucets will decline from 2021 to 2022 due to the squeeze of price spreads; With the price in line with the price and the cost falling, the cash flow is expected to improve. Comparing the ROIC and ROE of the five leading urban gas companies with Yangtze Power, the ROIC & ROE of China Resources Gas, China Gas, and ENN Energy are generally higher than those of Yangtze Power; Kunlun Energy and Towngas Smart Energy are slightly lower than Yangtze River Power.
Excerpts from the report:
(This article is for informational purposes only and does not represent any investment advice from us.) To use the information, please refer to the original report. ）
Selected report source: [Future Think Tank]. Future Think Tank - Official Website