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Announcement:

Moody's: HKCG's 1H 2017 results are in line with expectations

22 Aug 2017

Hong Kong, August 22, 2017 -- Moody's Investors Service says that The Hong Kong and China Gas Co Ltd's (HKCG) 1H 2017 results are in line with Moody's expectations and will not immediately affect its A1 issuer rating and its stable outlook.

"HKCG's stable 1H 2017 results reflect the steady growth in its utilities business in China and the resilience of its gas operations in Hong Kong," says Ralph Ng, a Moody's Analyst.

"Continuous capital spending on its new energy segment will bring business risks to the company's overall credit profile." adds Ng.

During 1H 2017, HKCG's revenue and reported EBITDA grew by 9% and 3% year-on-year to HKD15.4 billion and HKD5.5 billion respectively, mainly driven by the 13% increase in gross sales volumes of its existing projects in China over the same period.

However, the decline in the EBITDA margin of its China utilities business to 27% in 1H 2017 from 30% in 1H 2016 was mainly prompted by a slight reduction in the dollar margin for its non-residential customers, reflecting a delay in cost pass-through for several projects in which city-gate gas tariffs were being increased during winter, when the demand for natural gas was high in China.

Moody's expects HKCG to recover the dollar margin for those projects in 2H 2017 and maintain its track record of passing through the changes in costs to end-users on a timely basis.

Given its position as the sole gas supplier in Hong Kong, HKCG's operations in Hong Kong continues to demonstrate a stable and modest growth in gas sales volumes; rising by 0.8% to about 15.9 million mega joules in 1H 2017, with a flat reported EBITDA margin of 53% when compared to 1H 2016, reflecting the resilience of such operations in Hong Kong.

HKCG's Hong Kong operations contributed 32% and 48% of its total revenue and EBITDA in 1H 2017.

Overall, HKCG maintained a stable credit profile in 1H 2017, which is line with Moody's expectations — with a Moody's-estimated adjusted debt/capitalization of 34% and adjusted funds from operations (FFO)/debt of 24%.

Moody's expects that HKCG's FFO/debt will stay at the lower end of the rating tolerance level of 22%-25% in 2017-2018. FFO interest coverage will moderate to around 5.0x-6.0x, given the higher financing costs following the increase in borrowings in China.

HKCG's new energy business in China will continue to require capital investments. The company plans to make about HKD6 billion in new investments during 2017-2019. Moody's projects that HKCG's annual capex will register around HKD6.5 billion over the next three years. HKCG's new energy business involved in exploitation and liquefaction of coalbed methane, coal-based chemicals, biomass energies, vehicular fuels, logistic hub and related facilities, as well as operating LPG filling stations and landfill gas projects.

Moody's expects HKCG's new energy business carries higher business risks than its piped gas business, because the performance of the former is sensitive to volatile commodity prices and is associated with higher execution and operating risks. Nevertheless, Moody's expects such risks should be mitigated by the company's prudent financial discipline and stringent internal risks control.

Moreover, its new energy business currently makes small contributions to its overall revenue and profit, accounting for 8% and 7% of total revenue and reported EBITDA during 1H 2017.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Hong Kong and China Gas Co Ltd (HKCG) -- listed on the Hong Kong Stock Exchange -- is mainly engaged in the production and distribution of gas, marketing of gas and appliances, and comprehensive after-sales services in Hong Kong.

The company also operates aviation fuel facilities at the Hong Kong International Airport, and owns a 15.8% stake in the IFC complex in Hong Kong.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ralph Ng
Analyst
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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