The continuous promotion of the "dual carbon" goal means that controlling carbon emissions and adjusting the energy structure will become the focus of the mainland's development in the next ten years or even decades. In this context, the policy has new requirements for the development of all walks of life, including the urban gas industry.
However, in recent years, Hong Kong-listed urban gas companies have passively borne the risk of declining operating performance on the one hand, and the overall valuation of the industry has suffered an irrational continuous decline on the other hand, as if it has entered a long "winter". However, as the time enters 2024, the low base in the early stage is superimposed on cost reduction, coupled with multiple positive catalysts such as residential gas prices, and the industry as a whole has entered a period of recovery.
As a result, the recent city gas IPO market has also been active again. Recently, Wuzhou Energy, a city gas company from Xuchang, Henan Province, submitted a prospectus to the Hong Kong Stock Exchange. As a veteran urban gas company that has been operating in Henan for more than 20 years, what is the meaning behind choosing to go public for financing at this point in time?
Industrial and commercial users are "blessed", and profitability is recovering
Zhitong Financial APP learned that Wuzhou Energy was established in 2001, located in Xuchang City, Henan Province, and has three franchise areas in Xuchang City, namely Changge Franchise Area, Xuchang Franchise Area, and Yanling Franchise Area. This was the lifeblood of Wuzhou's energy business: the sale of piped natural gas to end-users through the city's pipeline network under concessions.
It is understood that Wuzhou Energy operates an urban pipeline network in its operating area, with no less than 1,500 kilometers of sub-high-pressure, medium-pressure and low-pressure pipelines. It has exclusive rights to sell and distribute piped natural gas and to build an urban pipeline network in the concession territory for a period of 30 years, expiring in May 2036, September 2041 and March 2042 respectively. According to Frost & Sullivan, in 2023, Wuzhou Energy is the largest natural gas distributor in Xuchang City in terms of pipeline natural gas sales to end users under exclusive concessions.
According to the prospectus, in the past 2021-2023, Wuzhou Energy's operating income was 948 million, 1.266 billion and 1.217 billion yuan (RMB, the same below) respectively, and after achieving leapfrog growth in 2022, its revenue will decline in 2023. The net profit attributable to the parent company in the corresponding period was 62.168 million, 111.6 million and 111.1 million yuan respectively, and its profit also fluctuated slightly with the ups and downs of income.
In terms of further breakdown, the sale of piped natural gas to end users is undoubtedly the core of Wuzhou Energy's main business, and the revenue contributed by this business accounts for about 70% of the total revenue in the past two years, while the remaining long-distance pipeline business accounts for about 20%. The remaining other businesses mainly include the provision of construction and installation services and the sale of compressed natural gas.
It is not difficult to see from the business structure of Wuzhou Energy that its business model is generally similar to that of other regional urban gas companies, and its main profit model is to earn the price difference by selling gas, and the business model is relatively simple. From the perspective of the structure of end users, Wuzhou Energy mainly relies on the "blessing" of industrial users in the operating area, and the revenue contributed by residential end users only accounts for about 7% of the business segment.
From 2021 to 2023, Wuzhou Energy's revenue from the sale of piped natural gas to industrial end users will be approximately RMB523 million, RMB814 million and RMB786 million respectively, accounting for approximately 88.2%, 90.1% and 89.2% of the total revenue from the sale of piped natural gas to end users. The reason why Wuzhou Energy was able to achieve a "big stride" in 2022 is mainly due to the addition of new industrial end users engaged in non-ferrous metal smelting and pressing, steelmaking and steel ring production in the Changge franchise area, which has increased its gas sales, and there are also factors that lead to an increase in selling prices due to the increase in procurement costs. In 2023, the fluctuation of this part of the performance is mainly due to the decline in the consumption of many industrial end users engaged in non-ferrous metal smelting and pressing in the Changge franchise area and involved in the pharmaceutical industry.
However, Wuzhou Energy's performance is naturally also affected by international gas prices. From the perspective of cost, from 2021 to 2023, the total cost of pipeline natural gas sold by the company will be about 723 million yuan, 990 million yuan and 934 million yuan respectively, accounting for about 89.5%, 92.9% and 91.0% of the total sales cost of each year, respectively, and the cost of gas source is undoubtedly the largest expenditure item of the company.
In 2023, the decline in international gas prices will reduce the gas source cost of urban gas enterprises, and in addition, the promotion of residential gas price smoothing is also continuing to restore the profitability of urban gas enterprises, and the operational stability of urban gas enterprises will also be guaranteed.
According to the research report of Shenwan Hongyuan, in 2024, the international gas price will continue to run at a low level (the US gas price will continue to run below $2/mmBtu), the economy of sea gas imports will continue to be highlighted, and the latest imported spot LNG CIF price in April will run at a low level of about $9/mmBtu, and the cost advantage will be more significant. The procurement cost pressure of urban gas with multiple gas sources has been reduced, and it is optimistic that the "industrial coal-to-gas" that was previously restricted by high prices and difficult to promote will make a breakthrough, and the industrial and commercial gas consumption with high gross difference will pick up and improve the sales structure of urban gas. From this point of view, Wuzhou Energy, which has a high proportion of industrial and commercial users this year, is expected to further repair its profit margins.
The market competition is fierce, and it may be difficult for franchises to be "worry-free"
For Wuzhou Energy, which is deeply cultivated in Henan Province and focuses on gas sales, having a 30-year franchise is undoubtedly the "Dinghai Shen Needle" that it has maintained stable operation for 20 years. According to the Frost & Sullivan report, in the future, Xuchang's natural gas consumption is expected to continue to increase and reach 971 million cubic meters in 2028, with a compound annual growth rate of 7.4% from 2023.
However, the expected expansion of market demand does not seem to mean that Wuzhou Energy can stabilize its regional operation and "lie down to make money". In June 2022, the General Office of the State Council issued the Implementation Plan for the Aging Renewal and Transformation of Urban Gas Pipelines (2022-2025), which proposes to strengthen market governance and supervision, support the merger and reorganization of gas and other industries, ensure the completion of aging and renovation tasks, and promote the large-scale and professional development of the gas market. In the context of the current acceleration of the integration of the national urban gas market, "resting on one's laurels" does not seem to be a good choice.
As the energy industry is a typical scale effect industry, with the gradual increase in the degree of marketization of the industry, the industry concentration continues to increase, and the market competition continues to intensify. At present, the gas sales volume of national gas enterprises such as Kunlun Gas, Towngas China Gas, China Resources Gas, and Xinao Gas accounts for more than 50% of the national market share. In addition, these large, cross-regional gas companies are also using their resources and cost advantages to continuously merge and acquire smaller gas companies to compete for new markets.
In this process, regional gas companies are often at a disadvantage in competing for new markets with these large companies, and they also need to avoid being acquired by these large companies. In addition, since the beginning of this year, the domestic policy of "one city, one enterprise" has accelerated, and the general trend of large-scale development of urban gas may also be one of the important reasons why Wuzhou Energy actively seeks independent listing of Hong Kong stocks.
Therefore, Wuzhou Energy will undoubtedly need more capital to achieve its own scale growth - if it can successfully achieve the Hong Kong stock market listing, it intends to expand its natural gas sales and distribution business through strategic investment, build a new natural gas pipeline with a total length of no less than 80.0 kilometers in the concession area in the next two years to expand its market coverage, connect the long-distance pipeline to more urban pipeline networks in the next two years, improve operational efficiency and safety through upgrading facilities, and work capital and other general corporate purposes.
On the other hand, from the perspective of the "dual carbon" policy orientation, natural gas has played an important alternative role in the process of withdrawing a high proportion of coal. In China's journey to achieve carbon neutrality, natural gas will play an important role as a bridge and a balance, and promote China's strategic goal of carbon emission reduction on the premise of meeting market supply requirements. However, although natural gas is a kind of clean energy, it is still in the category of fossil energy, and there is no "near-term worry" at present, but the "long-term concern" of being replaced by renewable new energy still exists.
Up to now, the vast majority of urban gas enterprises in the industry have begun to lay out the integrated development of multiple energy sources, and this kind of growth space will also become a key factor in judging the intrinsic value of gas companies in the future, because this is not only in line with the development trend of the times, but also from another perspective, the multi-energy integrated development of urban gas companies will open up new growth space, and the growth will be further improved.
Therefore, after achieving scale growth, the structural transformation of regional urban gas enterprises such as Wuzhou Energy is also imperative. And this may be the next important proposition about "growth choices" that the company will have to think about after going public.