Huzhou Gas Co., Ltd. (hereinafter referred to as 'Huzhou Gas') successfully went public on July 13, 2022, with a global issuance of 50,000,000 shares at an issue price of HK$6.08 per share.
During the Hong Kong listing process, Frost & Sullivan mainly undertook the following tasks: helping the issuer accurately and objectively understand its positioning in the target market, using objective market data to discover, support, and highlight the issuer's competitive advantages, assisting the issuer, sponsor, and other professional intermediary institutions in completing the writing of relevant parts of the prospectus (such as the overview, competitive advantages and strategy, industry overview, business, and other important sections), assisting the issuer in communicating with the Hong Kong Stock Exchange and investors, helping investors quickly understand the market ecosystem and competitive landscape, and assisting the issuer in completing feedback on industry-related issues from the Hong Kong Stock Exchange.
Overview of the Natural Gas Industry in Zhejiang Province and Huzhou City
Definition and Classification
Natural gas is a flammable gas originating from deep underground, mainly composed of methane with small amounts of ethane, propane, butane, nitrogen, etc. Natural gas is also a clean fossil fuel, releasing less carbon dioxide than coal and oil. Compared to other fossil and biomass fuels, natural gas can burn efficiently to produce heat and electricity, generating fewer waste and toxic substances during use. The downstream application areas of the natural gas industry include industrial, commercial, and residential sectors.
Natural gas can be divided into three main categories: 1) liquefied natural gas (LNG); 2) pipeline natural gas (PNG); and 3) compressed natural gas (CNG). Liquefied natural gas is a type of natural gas that is converted into a liquid state through cooling. The liquefaction process involves removing certain components such as dust, acidic gases, helium, water, and heavy hydrocarbons. Subsequently, the natural gas is cooled to about -162°C near atmospheric pressure and condensed into a liquid. Liquefied natural gas must be kept at a low temperature to maintain its liquid state and is not affected by pressure. Pipeline natural gas refers to natural gas that is transported and traded in gaseous form through pipelines. Pipeline natural gas is not stored at a single location but is continuously supplied from the source through pipelines. Pipeline natural gas is suitable for China, the European continent, North America, and other countries and regions where pipelines can be laid to directly import natural gas from neighboring countries (or regions). Compressed natural gas refers to gaseous natural gas that has been compressed to a pressure greater than or equal to 10 MPa and not greater than 25 MPa, then undergoes high-pressure dehydration and is stored in containers as a gas. It has the same composition as pipeline natural gas and can be used as an alternative fuel for vehicles, making it one of the ideal alternative energy sources for vehicles.
Industrial chain analysis
The industrial chain of the natural gas industry mainly includes four parts: source, transportation, distribution, and consumption. Natural gas sources include domestic major natural gas-producing areas and international imports. Subsequently, natural gas is transported to large industrial customers and local distribution networks through large-diameter high-pressure steel pipelines. For ease of distribution, natural gas is first transported to provincial-level natural gas enterprises and then sent to local natural gas enterprises through urban gate stations. Local natural gas enterprises reduce the pressure and deodorize the natural gas (for leak detection purposes), and then transport it to end-users such as industry, commerce, and residential areas through smaller low-pressure pipelines.
Source: Frost & Sullivan report
China's natural gas production and consumption
To cope with the reform of the energy structure, China's natural gas production and consumption have been increasing continuously over the past few years. Due to continuous investment in gas source exploration and development, natural gas supply has also been increasing. Natural gas production and consumption increased from 148 billion cubic meters and 239.4 billion cubic meters in 2017 to 205.3 billion cubic meters and 366.5 billion cubic meters in 2021, with compound annual growth rates of about 8.5% and 11.2%, respectively.
According to the 'Guiding Opinions on Energy Work in 2022', natural gas production is expected to reach about 214 billion cubic meters in 2022. With increased investment in natural gas exploration, it is projected that natural gas production will reach about 262.7 billion cubic meters by 2026, with a compound annual growth rate of about 5.3% starting from 2022. It is estimated that natural gas consumption will reach 555.8 billion cubic meters by 2026, with a compound annual growth rate of about 8.7% starting from 2022.
Source: National Bureau of Statistics of China; Frost & Sullivan report
Natural gas consumption in Zhejiang Province
Affected by the continuous promotion of coal-to-gas conversion and the widespread use of natural gas, natural gas consumption in Zhejiang Province has been steadily increasing, rising from 10.5 billion cubic meters in 2017 to 18 billion cubic meters in 2021, with a compound annual growth rate of about 14.4%. Benefiting from factors such as improved natural gas infrastructure, increased natural gas power generation, and the continuous recovery of industrial production, natural gas consumption in Zhejiang Province achieved rapid growth in 2021.
The '14th Five-Year Plan for the Development of Coal, Petroleum and Natural Gas in Zhejiang Province', released in July 2021, indicates that by 2025, natural gas consumption in Zhejiang Province will reach 315 billion cubic meters. It is expected that natural gas consumption in Zhejiang Province will increase from 20.7 billion cubic meters in 2022 to 352 billion cubic meters in 2026, with a compound annual growth rate of about 14.2%. It is also projected that the proportion of natural gas consumption in Zhejiang Province to China's total will grow from 5.2% in 2022 to about 6.3% in 2026.
Source: National Bureau of Statistics of China; Frost & Sullivan report
Total energy consumption structure in Zhejiang Province
The energy consumption structure in Zhejiang Province has been continuously optimized, with the proportion of coal decreasing from 49.8% in 2017 to about 36.5% in 2021. The proportion of natural gas in total energy consumption increased from 6.0% in 2017 to about 9.3% in 2021. In February 2021, the Development and Reform Commission of Zhejiang Province and the Energy Bureau of Zhejiang Province released the "Zhejiang Province Energy Development '14th Five-Year Plan' (Draft for Soliciting Opinions)", setting the target proportion of natural gas in total primary energy consumption at 10.6% by 2025. In July 2021, the Development and Reform Commission of Zhejiang Province and the Energy Bureau of Zhejiang Province released the "Zhejiang Province Coal, Oil and Natural Gas Development '14th Five-Year Plan'", indicating that by 2025, the target proportion of natural gas in total primary energy consumption will reach 12.98%. With the implementation of more policies during the '14th Five-Year Plan' period, the energy consumption structure in Zhejiang Province will be further optimized and lean towards cleaner energy sources such as natural gas.
Source: Zhejiang Provincial Bureau of Statistics; Frost & Sullivan report
Natural gas consumption in Huzhou City
Affected by the continuous popularization of natural gas use, the consumption of natural gas in Huzhou City has grown rapidly, increasing from 710 million cubic meters in 2017 to 1.24 billion cubic meters in 2021, with a compound annual growth rate of about 15.0%. In 2019, the Huzhou Development and Reform Commission issued the "Three-Year Action Plan for the Development and Reform Special Campaign (2018-2020) to Win the Blue Sky Defense Battle in Huzhou City," aiming to accelerate the development of natural gas infrastructure and promote natural gas consumption. The Huzhou Development and Reform Commission also issued the "Opinions on Further Strengthening Energy Security Management (Draft for Soliciting Opinions)" in 2019, setting the goal that the proportion of natural gas consumption in total energy consumption will reach over 10% by 2020.
Looking ahead, the natural gas consumption in Huzhou City is expected to increase from 1.42 billion cubic meters in 2022 to 2.45 billion cubic meters in 2026, with a compound annual growth rate of about 14.6%, which is higher than the growth rate of Zhejiang Province. The proportion of natural gas consumption in Huzhou City's total consumption in Zhejiang Province is expected to reach about 7.0% by 2026.
Source: Frost & Sullivan report
Natural gas pricing method
According to the 'Notice on Adjusting Natural Gas Prices' issued by the National Development and Reform Commission, the purchase price of natural gas is controlled by the government. Zhejiang Province has formulated gate station prices for selling natural gas to various cities in accordance with the 'Administrative Measures for Provincial Natural Gas Pipeline Transportation Prices in Zhejiang Province'. When setting the purchase price of natural gas, the government mainly considers factors such as the natural gas ex-factory price and pipeline transportation costs. At the same time, the overall macroeconomic situation will also be taken into account during the pricing process. For example, after the outbreak of the novel coronavirus pandemic, the government reduced the purchase price of natural gas for non-residential users in February 2020 to support enterprises in resuming production.
After natural gas passes through the gate station, it is purchased by the city's natural gas company and then distributed to end-users through a distribution network. The purchase price of the city's natural gas company is usually lower than or equal to the gate station price. The retail price for end-users such as residential and non-residential customers is typically composed of the gate station price plus pipeline transportation costs, which is further subject to price control regulations such as price caps or fixed prices determined by local governments (such as the Huzhou Development and Reform Commission). The gate station price, pipeline transportation costs, and downstream gas demand are the main factors considered by local governments when setting natural gas guiding selling prices.
In 2018, the Zhejiang Provincial Price Bureau issued the 'Notice on Printing and Distributing the 'Measures for the Administration of Urban Gas Prices in Zhejiang Province' and the 'Measures for the Supervision and Audit of Urban Gas Distribution Pricing Costs in Zhejiang Province', requiring that residential users adopt a tiered pricing system. For non-residential (except large customers) users, the government-guided maximum selling price applies. The government-guided prices for non-residents include gate station prices and pipeline transportation costs (mainly affected by the distance from the gate station to the user).
The 'Notice on Formulating the Distribution Prices for Non-residential Natural Gas Pipelines in Huzhou City and Establishing a Price Linkage Mechanism between Upstream and Downstream' issued by the Huzhou Development and Reform Commission in 2019 requires that urban natural gas companies, when negotiating sales prices with non-residential users, consider factors such as procurement prices, maximum selling prices, user gas consumption, and user types. The natural gas procurement prices of urban natural gas companies are linked to their sales prices, showing a similar trend of change.
Main driving factors
-
The downstream market demand is constantly growing
According to the 'Natural Gas Development 13th Five-Year Plan', China is committed to increasing the proportion of natural gas consumption in total primary energy consumption to over 10% by 2020. The government has introduced a number of policies aimed at reducing coal consumption, thus current coal substitute consumption will bring huge market potential to natural gas companies. In addition, it is expected that the use of natural gas in different downstream industries will also increase. As China's industrial added value increases from RMB 2.75 trillion in 2017 to RMB 3.73 trillion in 2021, it is expected that the demand for natural gas in the industrial sector will rise. Due to the transformation of energy consumption structure and the growth of downstream market demand, it is estimated that the demand for natural gas from other sectors such as commerce and residential will also increase in the coming years.
-
The popularization rate of natural gas continues to rise
The development of natural gas infrastructure has enabled more enterprises and residents to use natural gas. According to the "Medium- and Long-Term Oil and Gas Pipeline Network Plan" released by the National Development and Reform Commission and the National Energy Administration in 2017, the total length of China's main natural gas pipeline network will reach 104,000 kilometers by 2020 and 163,000 kilometers by 2025. In addition, the "Zhejiang Province Natural Gas Pipeline Network Special Plan" proposes that by 2020, each county can connect to the natural gas network through the province-wide comprehensive natural gas pipeline network. Furthermore, the "Zhejiang Province Coal, Petroleum, and Natural Gas Development '14th Five-Year Plan' (Draft for Soliciting Opinions)" has set a goal that the total length of the main natural gas pipeline network will reach 4,500 kilometers by 2025.
Driven by the acceleration of natural gas pipeline construction, it is expected that the length of urban natural gas pipelines in Zhejiang Province will increase to 85,300 kilometers by 2026, with a compound annual growth rate of 8.7% starting from 2022. Infrastructure development can accelerate the deployment of natural gas supply networks in areas where natural gas use is relatively low, thereby promoting downstream applications and expanding the scope of natural gas use.
-
Favorable government policies
Policies that promote the development of natural gas infrastructure and energy structure adjustment are the main driving forces for promoting natural gas consumption by enterprises and residents and stimulating the development of the natural gas industry. The 'Zhejiang Province Energy Development & 14th Five-Year Plan' (Draft for Soliciting Opinions) and the 'Zhejiang Province Coal, Oil and Natural Gas Development & 14th Five-Year Plan' (Draft for Soliciting Opinions) released in 2021 propose goals and guiding principles for promoting the development of the natural gas industry in Zhejiang Province, such as: 1) increasing natural gas consumption; 2) improving the natural gas penetration rate among residents; 3) enhancing natural gas storage capacity; and 4) establishing liquefied natural gas receiving stations and distribution systems covering the Yangtze River Delta region.
To protect the environment, the Huzhou Municipal Government has also issued the 'Huzhou Three-Year Action Plan for Winning the Blue Sky Defense Battle (2018-2020)', aiming to accelerate the elimination and transformation of coal-fired boilers. In addition, the government is encouraging natural gas suppliers to build local gas storage stations to support the gas peaking emergency system, thereby ensuring long-term and stable gas supply. Such favorable government policies continue to drive the development of the natural gas industry.
Market trend
-
Environmental awareness is constantly increasing
The focus on the environment is the main reason for the continuous growth in China's natural gas demand. Severe air pollution has prompted the country to shift from coal to natural gas, and the government has taken multiple actions to promote a reduction in coal consumption. In 2014, the 'Energy Development Strategy Action Plan (2014-2020)' set energy supply and demand targets, with the primary goal of reducing coal consumption and encouraging users to switch to other fuels such as natural gas. The plan aims to improve energy efficiency, reducing total primary energy consumption to 4.8 billion tons of standard coal by 2020. Developing natural gas is an important solution to environmental protection, and therefore, the growing demand for environmental protection will continue to promote the future development of the natural gas industry.
-
Broader cooperation with overseas suppliers
By cooperating with domestic and international gas fuel suppliers, natural gas companies can promote market stability by filling supply and demand gaps. In recent years, China's total natural gas imports have increased rapidly, rising from 955 billion cubic meters in 2017 to 1675 billion cubic meters in 2021. China has established natural gas cooperation relationships with countries in the northwest (Central Asia Gas Pipeline), southwest (China-Myanmar Oil and Gas Pipeline), and northeast (China-Russia Gas Pipeline). International cooperation can not only make up for the shortage of natural gas fuel supply but also reduce transaction intermediaries through direct transactions with upstream suppliers, thereby lowering prices.
In addition, China's total imports of liquefied natural gas (LNG) increased significantly from 3.81 million tons in 2017 to 7.89 million tons in 2021. Zhejiang Province enjoys a superior geographical location and convenient transportation, which will strengthen its cooperation with overseas suppliers. Zhejiang Province and its cities (such as Huzhou City), located along the coast with convenient transportation, have established stable business relationships with LNG suppliers, further promoting LNG imports. With the integrated development of the Yangtze River Delta region, the natural gas industry in Zhejiang Province and its cities (such as Huzhou City) will achieve rapid growth.
-
Comprehensive process control and monitoring
Due to the need for natural gas companies to ensure timely delivery to end-users and to be able to respond quickly to pipeline leaks, equipment failures, or any other abnormal activities along the line, complex control systems are required to monitor gas transportation in long-distance pipelines. Therefore, a centralized gas control system must be established to collect, analyze, and manage data received from urban gate stations and compressor stations along the pipeline. Centralized systems such as SCADA (Supervisory Control And Data Acquisition) systems are cost-effective in controlling pipeline operations and obtaining data for further analysis. The relevant data includes a vast amount of information used for a comprehensive analysis of pipeline operation conditions. Natural gas companies can remotely operate and monitor indicators such as flow rate, pressure, and temperature, thereby improving overall operational efficiency.
-
Accelerate the market-oriented reform process of natural gas
Currently, China's natural gas market operates on a point-to-point transaction basis, with natural gas gate station prices accompanied by complex and variable pipeline transportation costs, which hinders the formation of a unified competitive natural gas market. In recent years, the Chinese government has taken a series of policies to accelerate the market-oriented reform of natural gas and has proposed the goal of 'controlling the middle and liberalizing both ends', that is, liberalizing gas sources and allowing the market to form sales prices, while the government only controls pipeline transportation prices.
Zhejiang Province is also actively promoting the market-oriented reform of natural gas. In recent years, the pipeline natural gas supply to natural gas distributors in Zhejiang has been monopolized by provincial natural gas pipeline companies. In April 2020, the Zhejiang Development and Reform Commission issued the 'Pilot Rules for Direct Transactions between Upstream and Downstream Natural Gas in Zhejiang Province and Pipeline Transportation (Trial)', encouraging upstream and downstream companies to directly conduct natural gas transactions and continue expanding the pilot project for gas transmission to effectively reduce gas costs. Looking ahead, driven by supportive policies, the market-oriented reform of natural gas will be further implemented and become one of the main development trends in the industry.
Top 5 Natural Gas Companies in Huzhou City by Sales Volume
In 2021, the natural gas sales volume in Huzhou reached 1.24 billion cubic meters. The companies in Huzhou's natural gas industry that ranked among the top five by sales volume accounted for a total market share of 92.1%. Huzhou Gas is the largest pipeline natural gas distributor in Huzhou, ranking first with a market share of about 44.1% in 2021.
Note: The sales volume of the aforementioned companies refers to the sales volume of pipeline natural gas.
Source: Frost & Sullivan report
Frost & Sullivan has extensive research experience in the energy and power industry, assisting well-known enterprises in successfully listing on capital markets. Recent successful listings include: MingYang Intelligent (MYSE:LI), North China Energy (NASDAQ:CNEY), SDIC Power (SDIC:LI), Naquan Energy Technology (1597.HK), Jiaxing Gas (9908.HK), Chuncheng Thermal Power (1853.HK), CNPC Clean Energy (1759.HK), Jiutai Bangda (2798.HK), TL Natural Gas (8536.HK), Tianbao Energy (1671.HK), Yuguang International (1621.HK), Jintai Feng (8479.HK), Zhongcheng Energy (2337.HK), Inner Mongolia Energy Engineering (1649.HK), Resco (1679.HK), Persta Resources (3395.HK), Xintec Energy (1799.HK), China Energy Engineering (3996.HK), and others.
Recommended Reading
05. Frost & Sullivan assists Jiaxing Gas in successfully going public in Hong Kong (9908.HK)
