China Gas Utilities
Paddle upstream or be swept
aside
Eric Cheng, CFA
Research Analyst
(852) 2203 6202
eric-ct.cheng@db.com
Michael Tong, CFA
Research Analyst
(852) 2203 6167
michael.tong@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research's Investment Policy Committee has deemed
this work F.I.T.T. for investors seeking differentiated ideas. We believe the
upstream gas suppliers' ambitions to move downstream could result in fewer
expansion opportunities for the China gas utilities and significantly alter the longerterm
industry landscape.
Deutsche Bank AG/Hong Kong
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208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
FITT Research
Top picks
Beijing Enterprises (0392.HK),HKD28.00 Buy
Companies featured
Beijing Enterprises (0392.HK),HKD28.00 Buy
2007A 2008E 2009E
P/E (x) 25.8 16.9 14.4
EV/EBITDA (x) 7.4 6.9 5.6
Price/book (x) 1.6 1.1 1.1
Hong Kong & China Gas (0003.HK),HKD15.40 Hold
2007A 2008E 2009E
P/E (x) 36.3 24.6 21.2
EV/EBITDA (x) 25.6 13.2 11.4
Price/book (x) 5.5 3.3 3.1
China Gas Holdings (0384.HK),HKD1.03 Hold
2008A 2009E 2010E
P/E (x) 76.4 26.5 13.1
EV/EBITDA (x) 25.8 11.3 9.5
Price/book (x) 2.1 1.0 1.0
Towngas China (1083.HK),HKD2.25 Buy
2007A 2008E 2009E
P/E (x) 42.3 16.2 12.7
EV/EBITDA (x) 17.8 6.0 4.1
Price/book (x) 1.4 0.7 0.7
XinAo Gas (2688.HK),HKD9.20 Hold
2007A 2008E 2009E
P/E (x) 23.0 16.2 13.6
EV/EBITDA (x) 12.7 9.8 8.5
Price/book (x) 4.1 1.9 1.7
Related recent research Date
Hong Kong & China Gas and Towngas China
Eric Cheng 15 Sep 2008
Beijing Enterprises - Net cash, low risk earnings, stay
overweight
Eric Cheng 18 Sep 2008
China Gas Hldgs - Remain cautious on relatively high
gearing
Eric Cheng 26 Sep 2008
XinAo Gas - Operationally on-track; looking beyond
2008
Eric Cheng 6 Oct 2008
Fundamental: Growth outlook remains robust
We remain positive on the operating environment for the China gas utilities sector.
With improvement in upstream gas infrastructure, natural gas supply could double
by 2010E and quadruple by 2020E from the 2005 level. We believe key
beneficiaries will be those who have a strong presence in cities located along
long-distance pipelines and reasonable access to upstream natural gas resources.
Industry: Natural gas supply is the only real industry bottleneck
We performed a long-term demand and supply analysis of China’s natural gas
market. Our conclusion is that supply will remain tight in the near term and
demand/supply is unlikely to reach a balance until 2010-11E. This implies that
upstream players will have a key advantage in securing new downstream projects
and penetrating into areas where downstream players already have an established
presence.
Thematic: Upstream players looking to share the downstream pie
CNPC, the parent of PetroChina, has indicated its interest in moving further down
the value chain. CNPC has recently integrated its 40+ city gas projects under
Kunlun Gas, which would be a dedicated flagship for CNPC’s downstream
operations. Also, we note that provincial-controlled midstream gas transmission
companies are looking to penetrate the downstream sector.
Thought Leading: Negative implications for downstream players
Besides facing decreasing expansion opportunities through acquisitions,
downstream players may be pressured to share equity stakes in some of their
franchise cities with upstream players in order to secure upstream gas supply.
Some downstream players have already responded by moving up the value chain.
However, the current scale of upstream gas investments for most of the
downstream players is still far from sufficient to support their existing downstream
business.
We prefer integrated players: Buy Beijing Enterprises
We believe integrated gas utilities with significant upstream and midstream
exposure are better positioned than peers with only downstream exposure.
Beijing Enterprises remains our top pick in the sector as it is likely to become the
most integrated downstream player in China in the next few years. Beijing
Enterprises could also leverage its upstream natural gas resources to facilitate its
expansion plan in neighbouring cities in the Bohai Rim area. Our sum-of-the-parts
target price of HK$35/share for Beijing Enterprises implies 14x 2009E P/E, which is
similar to its peers, but offers higher quality earnings.

Executive summary
Upstream players building momentum to enter downstream
CNPC currently controls c.70% of the upstream natural gas market in China. The company
recently consolidated its downstream gas portfolio under a new vehicle and is building
momentum to further penetrate the downstream market. This is likely to imply fewer growth
opportunities for existing downstream gas utilities and we see scope for the downstream
sector to share some project stakes with upstream players in order to secure more natural
gas.
True, more natural gas will be made available with the improvement in the upstream natural
gas infrastructure. However, our demand and supply analysis shows that the situation is
unlikely to reach a balance before 2010-11E. The tight natural gas supply situation will give
the upstream players more bargaining power in negotiating new downstream projects and
penetrating into areas where existing downstream players already have an established
presence.
The first part of this F.I.T.T. report addresses the trend for upstream players to move
downstream, including a detailed review of CNPC’s downstream vision, its implication for
downstream players, and a detailed comparison of upstream and midstream exposure for
various downstream gas utilities. The latter part of this report provides a review of the
downstream market fundamentals with a detailed analysis of the natural gas demand and
supply outlook in the next 5-10 years.
We prefer integrated gas utilities
We believe integrated gas utilities with significant exposure to upstream and midstream
business are better positioned than peers with only downstream exposure. We reiterate our
preference for Beijing Enterprises (Buy). The company is likely to be the most integrated
downstream player in China in the next few years as its potential upstream supply capability
would account for 240% of its 2007 gas sales volume. Also, we believe Beijing Enterprises
could leverage these upstream gas resources to facilitate its expansion plan in the Bohai Rim.
Beijing Enterprises has outperformed its peers and the HSCEI in the past six months (down
14% vs. 23-50% for its peers and 42% for the HSCEI), which we believe was attributable to
the company’s high earnings visibility and relative defensiveness in the market. At current
valuations, Beijing Enterprises is trading at 14x 2009E P/E, which is similar to its peers but
offers higher quality earnings, and a 2.1% 2008E dividend yield, which is among the highest
compared to other China gas utilities.
Key risks
Aside from the increasing involvement of upstream gas suppliers, another key downside risk
to most of the China gas utilities still relates to the cancellation of connection fees (except for
Beijing Enterprises), though we believe this is unlikely to happen in the next several years.
Connection fee income may also be affected by the likely property market slowdown in China
and there could be margin squeeze from potential rising natural gas costs. We believe there
could also be longer-term risk on the regulatory front if the government decides to cap
returns for the entire sector.
Upside risks could come from higher-than-expected gas sales volume and potential valueaccretive
acquisitions for downstream players.

Changing industry landscape
Key points
􀂄 Upstream and/or midstream building momentum downstream:
􀂄 CNPC has an aggressive expansion plan for downstream
􀂄 Regional/provincial pipeline company moving down the value chain
􀂄 CNOOC could be another potential downstream player
􀂄 Implications for city gas companies:
􀂄 Less acquisition opportunities in the future
􀂄 May be forced to further cooperate with upstream players
􀂄 Likely more competition on direct supply to “big-ticket” industrial customers
􀂄 Concerns could be further exacerbated by the tight natural gas supply situation near term
􀂄 Conclusion: Prefer downstream players with secured upstream resources
􀂄 Top pick: Beijing Enterprises (Buy)
􀂄 CNPC-HK: An upside play on gas project injections by CNPC

Table of Contents
Executive summary ........................................................................... 3
Changing industry landscape ........................................................... 4
Forward integration by upstream and midstream players.........................................................4
Implications for downstream players........................................................................................7
Tight demand and supply balance situation favours CNPC.......................................................9
We prefer integrated players ..................................................................................................11
Downstream fundamentals ............................................................ 19
Demand remains strong and expected to outstrip supply ......................................................19
Regulatory environment favours city gas sector.....................................................................22
Natural gas pricing mechanism...............................................................................................23
Competitiveness of natural gas over alternative fuels ............................................................24
Beijing Enterprises .......................................................................... 26
Hong Kong & China Gas.................................................................. 34
Towngas China ................................................................................ 41
XinAo Gas......................................................................................... 47
China Gas Holdings ......................................................................... 58
Appendix A: Other players.............................................................. 63
China Resources Gas..............................................................................................................63
Kunlun Gas.............................................................................................................................65
Zhengzhou Gas .......................................................................................................................66
Shaanxi Provincial Natural Gas Company (002267.SZ)............................................................68
Appendix B: Gas glossary ............................................................... 71