Gas Distribution
Creating synergy key to business diversification
Initiate:
NEUTRAL
BUY
Pusan City Gas
(M: 015350, TP: W26,800)
Yesco
(M: 015360, TP: W35,800)
HOLD
Samchully
(M: 004690, TP: W151,000)
Seoul City Gas
(M: 017390, TP: W67,600)
Daehan City Gas
(M: 026870, TP: W27,800)
Kyung Dong City Gas
(M: 012320, TP: W55,100)
 Initiating coverage with NEUTRAL recommendation: We initiate coverage on the
gas distribution industry with a NEUTRAL rating, as retailers are facing the challenges
of slowing growth and declining profitability, despite strengths of: 1) stable financial
structures; 2) high dividend payments; 3) attractive valuation; and 4) being defensive
stocks. Our top picks are Pusan City Gas for its growth potential and Yesco for its
attractive valuation.
 Pusan City Gas ranks highest on the Samsung gas distributor scoreboard: To
measure the qualitative aspects of gas distribution firms, the Samsung gas distributor
scoreboard weighs: 1) growth momentum; 2) accessibility by institutional investors; 3)
dividend payments; and 4) quality of IR activities. In these categories, Pusan City Gas
ranks highest and Yesco third.
 Domestic gas distribution industry nearing maturity: We believe Korea’s gas
distribution industry is nearing maturity and will deliver sales volume growth of 3%~4%
pa. Except in a few provincial areas, penetration growth is slowing markedly, and given
the unlikelihood of local entities raising unit supply costs, profitability should increase in
proportion to sales volume—suggesting that margins are in for steady declines.
 CES business a discount factor: To diversify their business portfolios, most gas
distributors are involved in community energy system (CES) businesses. However, we
consider this a negative as: 1) the business is heavily regulated, thus operators are
prevented from passing on higher costs by raising tariffs; and 2) it is likely to take time
for CES businesses to generate normalized sales, given the poor housing and building
sales amid a construction industry slump.
 Creating synergy key to business diversification: As growth in the domestic gas
distribution industry is topping out, firms are diversifying their business portfolios.
Some firms are expanding into energy-related areas, such as forming overseas gas
distribution companies, overseas resource development, and importing and
wholesaling to the domestic natural gas market. Other firms are rushing into non
energy-related businesses, such as catering, asset management, offline institutes, and
food processing. In terms of generating synergy, Pusan City Gas appears to have the
most promising prospects. However, any foray by firms into areas unrelated to industry
core competences is likely to prove a discount factor, and unlikely to deliver sustained
growth.

Contents
Investment summary .................................................................................................. 3
Valuation ...................................................................................................................... 4
Initiating sector coverage at NEUTRAL..................................................................... 4
Samsung gas distributor scoreboard evaluations…................................................ 10
Business overview .................................................................................................... 12
State of the market .................................................................................................. 12
Domestic gas distribution industry near maturity..................................................... 15
Supply costs unlikely to rise for the time being........................................................ 16
Sales volume is key................................................................................................. 18
Growth momentum overview ................................................................................... 19
CES business .......................................................................................................... 19
Overseas business expansion................................................................................. 21
Other business diversification efforts....................................................................... 22
Earnings estimates ................................................................................................... 25
Appendix .................................................................................................................... 27
Sales volume by customer (2001~2011)................................................................. 28
Share holding structure ........................................................................................... 29
Stakes in Subsidiaries ............................................................................................. 30
P/E band chart......................................................................................................... 31
P/B band chart......................................................................................................... 32
Company
Samchully ................................................................................................................ 33
Seoul City Gas......................................................................................................... 35
Daehan City Gas ..................................................................................................... 37
Pusan City Gas........................................................................................................ 39
Kyung Dong City Gas .............................................................................................. 41
Yesco....................................................................................................................... 43

Investment summary
We initiate coverage on the gas distribution industry with a NEUTRAL rating, as retailers
are facing the challenges of slowing growth and declining profitability, despite such
strengths as: 1) stable financial structures; 2) high dividend payments; 3) attractive
valuation; and 4) being considered defensive stocks. Our top picks are Pusan City Gas for
its growth potential and Yesco for its attractive valuation. To calculate target prices, we
applied company-specific discounts set by our Samsung gas distributor scoreboard to the
simple average of fair values derived from a residual income model (RIM) and P/E
valuation.
To measure qualitative aspects not reflected in the RIM and P/E valuations, the scoreboard
weighs: 1) growth momentum—ie, business diversification efforts; 2) accessibility by
institutional investors—ie, the 60-day average trading value and free float; 3) dividend
payments—ie, continuity and dividend yield; and 4) quality of IR activities—ie, the
number of IR-dedicated personnel and related activities. Pusan City Gas scored highest.
We believe Korea's gas distribution industry is nearing maturity and will deliver sales
volume growth of 3~4% pa. Except in a few provincial areas and some delayed capex
spending—especially for community energy system (CES) projects, which can create huge
demand—we expect the growth rate of sales volume to decline amid by slowing
penetration. Given the unlikelihood of local autonomous entities raising unit supply costs,
profitability at gas distribution companies should grow in proportion to sales volume—
suggesting without a unit supply cost increase, some growth in the rate of sles volume is
necessary to maintain margins.
To diversify their business portfolios, most of gas distributors have engaged in—or
considered—CES businesses. However, we such businesses as negative, as: 1) they are
heavily regulated, thus operators cannot pass on higher costs to customers by raising
tariffs; and 2) it is likely to take time for CES businesses to generate normalized sales,
given the poor housing and building sales amid a construction industry slump. We believe
Samchully is most vulnerable to CES risks.
As growth in the domestic gas distribution industry is reaching its limit, firms are striving
to diversify their business portfolios. Some are expanding into energy-related areas, such
as forming overseas gas distribution companies, overseas resource development, and
importing and wholesaling domestic natural gas market. Other firms are rushing into
non-energy businesses, such as catering, asset management, offline institutes, and food
processing. In terms of synergy creation, Pusan City Gas, which is pursuing gas
distribution overseas, appears to have the most promising prospects. However, any foray
by firms into areas unrelated to their core competences is likely to become a discount
factor, and unlikely to deliver sustained growth.