Therefore, the recent IPO market for urban gas companies has become active again. In the context of the sustained promotion of the "dual carbon" goal, controlling carbon emissions and adjusting energy structure will become a key focus of China's development for the next several decades. This means that policies have new requirements for the development of various industries, including the urban gas industry.
However, in recent years, Hong Kong-listed urban gas companies have been passively facing the risk of declining business performance, while the overall valuation of the industry has encountered irrational continuous decline, as if entering a long "winter". But as time enters 2024, the industry as a whole enters a repair period with the additional benefits of low base number and reduced cost, as well as multiple catalysis of positive factors such as rising consumer demand for natural gas. Therefore, the recent IPO market for urban gas companies has become active again. Recently, Wuzhou Energy, a municipal gas company from Xuchang, Henan, submitted a prospectus to the Hong Kong Stock Exchange. As an old-line urban gas company that has been operating in Henan for more than 20 years, what is the deep meaning behind its choice to list at this time and raise funds?
According to the prospectus, Wuzhou Energy was founded 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 has already determined the lifeblood of Wuzhou Energy's business, which is to sell natural gas through the urban pipeline network to end users based on the franchise rights. Wuzhou Energy operates a municipal gas pipeline network in its franchise area, with no less than 1,500 kilometers of sub-high pressure, medium pressure and low pressure pipelines. It has the exclusive rights to sell and distribute pipeline natural gas and to build the urban pipeline network in the franchise area for a period of 30 years, with expiration dates of May 2036, September 2041, and March 2042 respectively. According to Foster Sullivan data, in 2023, according to the pipeline natural gas sales volume to end users exclusively based on the franchise rights, Wuzhou Energy was the largest natural gas distributor in Xuchang City.
The continued promotion of the "dual carbon" goal means that the control of carbon emissions and the adjustment of energy structure will become a key focus of China's development for the next several decades. Therefore, policies have new requirements for the development of various industries, including the urban gas industry.
With the support of industrial and commercial users, the profitability of Wuzhou Energy is now recovering.
It is understood that Wuzhou Energy operates a municipal gas pipeline network in its franchise area, with no less than 1,500 kilometers of sub-high pressure, medium pressure and low pressure pipelines. Its main business is to sell pipeline natural gas to end users through the urban pipeline network based on the franchise rights. Wuzhou Energy's revenue from selling pipeline natural gas to industrial end users in 2021-2023 was about RMB 523 million, RMB 814 million and RMB 786 million, accounting for about 88.2%, 90.1% and 89.2% of the total revenue from selling pipeline natural gas to end users respectively.
From the business structure of Wuzhou Energy, it is not difficult to see that its business model is similar to that of other regional urban gas companies. The main profit model is to earn the price difference by selling gas, and the business model is relatively simple. From the structure of end users, Wuzhou Energy mainly relies on the support of industrial users in its franchise area, and revenue from residential end users accounts for only about 7% of the revenue from this business segment.
According to the prospectus, Wuzhou Energy had operating income of RMB 948 million, RMB 1.266 billion and RMB 1.217 billion (RMB is the same below) in 2021-2023 respectively. After achieving a leap-forward growth in 2022, its revenue decreased in 2023. The net profit attributable to shareholders of the parent company during the corresponding period was RMB 62.168 million, RMB 111.6 million and RMB 111.1 million, and its profit fluctuated slightly with the fluctuation of revenue.
To further subdivide, selling pipeline natural gas to end users is undoubtedly the core of Wuzhou Energy's business. The revenue contribution of this business segment in the past two years accounts for about 70% of the total revenue, while the proportion of the remaining long-distance pipeline business is about 20%. The remaining other businesses mainly include providing construction and installation services and selling compressed natural gas.
From the business structure of Wuzhou Energy, it is not difficult to see that its business model is similar to that of other regional urban gas companies. The main profit model is to earn the price difference by selling gas, and the business model is relatively simple. From the structure of end users, Wuzhou Energy mainly relies on the support of industrial users in its franchise area, and revenue from residential end users accounts for only about 7% of the revenue from this business segment.
In 2021-2023, Wuzhou Energy's revenue from selling pipeline natural gas to industrial end users was about RMB 523 million, RMB 814 million and RMB 786 million, accounting for about 88.2%, 90.1% and 89.2% of the total revenue from selling pipeline natural gas to end users respectively. The reason why Wuzhou Energy was able to take a big step forward in 2022 was mainly due to the addition of industrial end users engaged in non-ferrous metal smelting and pressing, steel smelting and steel ring production in the changge franchise area, which increased its gas sales volume, and the rise in selling price due to the rise in procurement cost. In 2023, the fluctuation of this part of performance was mainly due to the decrease in consumption of industrial end users engaged in non-ferrous metal smelting and pressing and the involvement of the pharmaceutical industry in the changge franchise area.
However, Wuzhou Energy's business performance is also naturally affected by international gas prices. In terms of costs, the total cost of pipeline natural gas already sold by the company in 2021-2023 is about RMB 723 million, RMB 990 million and RMB 934 million respectively, accounting for about 89.5%, 92.9% and 91.0% of the total sales cost in each year. The cost of gas source is undoubtedly the largest expenditure item of the company.
In 2023, the decline in international gas prices has reduced the gas source cost of urban gas companies. In addition, the steady progression of work on the rising price of residential gas demand is also continuing to repair the profitability of urban gas companies, and the stability of the operation of urban gas companies will also be guaranteed.
According to the research report from SWhy, by 2024, the international gas price will continue to operate at a low level (the US gas price will continue to operate below the range of $2/mmBtu), and the economic benefits of imported gas will continue to emerge. The latest import spot LNG price in April is about $9/mmBtu, and the cost advantage is more significant. With the relief of purchasing cost pressure for multi-source gas city heating, it is optimistic that the "industrial coal-to-gas" that was previously constrained by high prices will make a breakthrough, and the high-gross margin for commercial and industrial gas will improve the city's gas sales structure. In this regard, Wuzhou Energy, which has relatively high proportion of commercial and industrial users this year, may have its profit space further repaired.
For Wuzhou Energy, which has been deeply involved in Henan Province and mainly sells gas, the 30-year franchise is undoubtedly its "magic weapon" to maintain stable operation for 20 years. The Foster Sullivan report shows that in the future, the natural gas consumption in Xuchang City is expected to continue to increase and will reach 971 million cubic meters in 2028, with a compound annual growth rate since 2023 of 7.4%.
However, the expanded expectation of market demand seems not to mean that Wuzhou Energy can stay in the regional operations and make "easy money." In June 2022, the General Office of the State Council issued the "Implementation Plan for the Renovation and Reconstruction of Aged Urban Gas Pipelines (2022-2025)," which proposed to strengthen market governance and supervision, support industry mergers and acquisitions, ensure the completion of the task of renovation and reconstruction of aged pipelines, and promote the scale and specialized development of the gas market. Against the backdrop of the current nationwide consolidation of urban gas markets, "standing still" seems not to be a good option.
As the energy industry is a typical industry with economies of scale, market concentration has been continuously increasing with the gradual marketization of the industry, and market competition has continued to intensify. Currently, national gas companies such as Kunlun Gas, Honghua Gas, China Resources Gas, and XinAo Gas account for more than 50% of the national market share in terms of gas sales. Moreover, these large cross-regional gas companies are still using their resource and cost advantages to continuously merge and acquire small gas companies to compete for new markets.
In this process, regional gas companies usually find themselves in a disadvantageous position when competing with these large companies for new markets, as well as avoiding being merged and acquired by these large companies. In addition, since this year, the policy of "one city, one enterprise" has been accelerating in China, and the trend of large-scale development of urban gas may also be one of the important reasons why Wuzhou Energy is actively seeking independent listing in Hong Kong stocks.
Therefore, Wuzhou Energy undoubtedly needs more funds to achieve its own scale growth. If it can successfully list on the Hong Kong Stock Exchange, it plans to expand its natural gas sales and distribution business through strategic investment, build new natural gas pipelines with a total length of no less than 80.0 kilometers in the special franchise operation area within the next two years, expand the market coverage, and connect more city pipeline networks with long-distance pipelines in the next two years. Upgrade facilities to improve operating efficiency and safety, and operation funds and other general corporate purposes.
On the other hand, from the perspective of the "dual-carbon" policy orientation, in the process of a high proportion of coal withdrawal, natural gas has played an important role in substitution. In the journey of achieving carbon neutrality in China, natural gas will play an important bridge and balancing role, and promote China's strategic goal of carbon reduction while meeting market supply requirements. However, although natural gas is a type of clean energy, it is still in the category of fossil energy, and there is no "imminent" crisis currently, but the "far-sighted" factor of being replaced by renewable new energy in the long term remains.
So far, most of the urban gas companies in the industry have begun to lay out the development of multiple energy sources, and this type of growth space will also become a key factor in judging the intrinsic value of gas companies in the future. Because this not only conforms to the development trend of the times but also opens up new growth space from another perspective, and the development of multi-energy integration for urban gas companies will further enhance their growth potential.
Therefore, after achieving scale growth, structural transformation of regional gas companies, such as Wuzhou Energy, will be imperative. This may be the next important issue that the company needs to consider regarding "growth decisions" after going public.