20131104-高盛-Gas_heating_demand_at_inflection_point__top_pick_still_CR_Gas__CL_Buy__16页_448kb

Summary of Gas Heating Demand and Policy Impact in China

Core Content

The document outlines the increasing demand for natural gas in China's heating sector, driven by government policies aimed at reducing coal consumption and improving air quality. It highlights the shift from coal to gas as a key strategy in the fight against air pollution, particularly in Northern China, where coal dominates heating energy consumption. The analysis also discusses the financial and policy implications of this transition, including the potential for gas-fired heating demand, the role of key companies, and the impact of subsidies.

Main Points

• Policy Shift: The Chinese government has launched an air pollution control action plan, targeting a 25% reduction in PM2.5 levels in Beijing, Tianjin, and Hebei by 2017. This plan includes coal consumption reduction and the promotion of natural gas as an alternative.

• Coal to Gas Transition: The policy aims to replace coal-fired heating systems with gas-fired ones, especially in highly polluted regions like Beijing, Tianjin, Hebei, and Shandong. The replacement of 83mn tonnes of coal is equivalent to 44.6bn m³ of natural gas demand.

• Heating Demand Growth: China's heating supply is currently dominated by coal (94% in 2011), with natural gas accounting for only 2.7%. If fully replaced, gas demand could increase by 149bn m³, nearly matching the country's 2012 gas demand of 147bn m³.

• Gas Supply and Growth: The gas industry is expected to grow rapidly, with supply projected to increase from 159bn m³ in 2012 to 372bn m³ in 2020E, a 11% CAGR. Potential supply growth comes from coal-to-gas projects, Russia pipeline, and unconventional gas.

• Gas-Fired Wall Hanging Furnaces: These are a key component of the gas heating shift, with sales expected to grow from 0.5mn units in 2009 to 5.0mn units by 2020E, a 20% CAGR. Installed base is projected to exceed 30mn units by 2020E.

• Regional Differences: The Northern provinces, especially those in the north of the Qinling Mountains and the Huai River, account for 81% of heating consumption. In contrast, the Southern provinces use more individual heating systems like fan-coil and radiator, making gas heating less viable in those areas.

• Cost Analysis: The cost of gas heating is higher than coal heating, with a per sqm difference of Rmb12.5. The government may need to provide a Rmb10.2/sqm subsidy to offset this cost gap, with a total estimated need of Rmb3.5bn for Beijing alone.

• Company Analysis: Companies such as CR Gas (CL Buy), Beijing Enterprises (BJE), and China Gas are identified as major beneficiaries of the gas heating shift. BJE is expected to benefit the most in the short term, while CR Gas and China Gas are well-positioned for medium and long-term growth.

Key Information

• Policy Impact: The government's air pollution control action plan is expected to significantly impact China's energy consumption structure, especially in the heating sector.

• Heating Demand by Province:

  • In 2011, coal accounted for 94% of heating supply, while natural gas was only 2.7%.
  • The Northern provinces, including Beijing, Tianjin, Hebei, and Shandong, are the main areas for coal replacement.

• Gas Demand Projections:

  • Gas-fired heating demand could reach 149bn m³ by 2020E, which is almost equivalent to the 2012 gas demand of 147bn m³.
  • The installed base of gas-fired wall hanging furnaces is projected to exceed 30mn units by 2020E.

• Subsidy Requirements:

  • The cost difference between gas and coal heating is Rmb12.5/sqm, with Rmb10.2/sqm likely to be covered by government subsidies.
  • A total of Rmb3.5bn in subsidies is estimated to be required for Beijing to support the transition to gas heating.

• Company Ratings and Target Prices:

  • CR Gas (1193.HK): Buy rating, with a target price of HK$24.5, representing a 22% upside.
  • Kunlun (0135.HK): Neutral rating, with a target price of HK$13.3, a 5% upside.
  • China Gas (0384.HK): Neutral rating, with a target price of HK$9.5, a 10% upside.
  • ENN Energy (2688.HK): Neutral rating, with a target price of HK$40.0, a 13% downside.
  • BEHL (0392.HK): Neutral rating, with a target price of HK$56.9, a 11% downside.
  • Towngas China (1083.HK): Sell rating, with a target price of HK$6.3, an 18% downside.

Conclusion

The shift from coal to gas in China's heating sector is at an inflection point, driven by stringent air pollution control policies. This transition presents significant growth opportunities for the gas industry, particularly for companies with strong presence in the Northern provinces. The government's role in subsidizing the transition is crucial, and the potential for gas-fired wall hanging furnace adoption is substantial, with both supply and demand expected to grow rapidly over the next decade.