The Zhitong Finance App learned that Fitch Ratings said that as China's gas utility companies slow down the pace of expansion, the average gas sales growth rate of the aforementioned companies between 2024 and 2026 may slow to the middle single digits from before 2022. Fitch expects the unit gross margin of the companies mentioned above to increase slightly in 2024 due to smoother cost transfer to residential users and lower natural gas procurement costs will increase EBITDA. Additionally, growth in EBITDA and lower capital expenditure will help most Fitch rated city gas distributors maintain or approach net cash positions.
According to Fitch, increased supervision (including higher safety requirements, anti-monopoly, and one-city-one-enterprise policies) has slowed the expansion of the industry. Furthermore, the decline in connectivity over the past two years has also led to a slowdown in user growth, while the unit sales volume of existing users has remained stable.
Fitch expects that the average gross margin per unit for Fitch rated Chinese gas utilities will improve in 2024. As upstream suppliers unify gas gate prices for residents and industrial and commercial gas controls (while industrial and commercial gas prices are generally higher), contract pipeline gas procurement costs for urban fuel distributors with large industrial and commercial gas exposure are expected to decrease. Despite a slight increase in the proportion of purchases of non-contracted gas supplies, spot gas prices have fallen 29% year on year since the beginning of 2024, which will contribute to the unit gross margin of gas utilities.
Furthermore, as many LNG terminals begin operation in the second half of 2023, Fitch expects that gas distributors' increased peak shifting capacity in the winter will help reduce the cost of imported LNG. Additionally, some Fitch issuers purchase liquefied natural gas at low cost during the off-season to smooth out gas purchase costs during peak seasons.
Fitch predicts that in 2024, the cost transfer of residents' gas sales will be smoother. Gas distributors are expected to pass 70%-80% of costs to residential users in 2024, compared to 60%-70% in 2023. Furthermore, by 2026, the average contribution of the gas connection business to EBITDA will drop to 15% from 21% in 2023. This is mainly due to growth in other sectors, and Fitch expects that the number of new connected users will drop further by 14% due to weakness in the real estate market.
Against the backdrop of slowing gas sales and connectivity business growth, Chinese gas utility companies are increasingly focusing on value-added services and the expansion of the integrated energy sector to seek new growth engines. Fitch anticipates that the average contribution of new business of certified gas distributors to EBITDA will rise from 12% in 2023 to 19% in 2026.