China Gas Evokes Huawei’s Early Days to Defend Its Rural Plan

(Bloomberg) --

China Gas Holdings Ltd. is holding fast to a strategy to expand in rural markets deemed too challenging by its rivals, and is evoking the experience of national technology giant Huawei Technologies Co. to help make its point.

The company has made a name for itself as China's biggest gas distributor by switching rural households from burning coal to using more of the cleaner fuel. Analysts have warned of the risks associated with the strategy, with Sanford C. Bernstein calling it the “biggest controversy” on the stock.

“People have asked me: is there really gas demand in China's rural areas?” Executive Chairman Liu Ming Hui said in an interview, adding the company has done a thorough analysis of the market. Huawei encountered similar concerns in its early days, Liu said. “Huawei didn't listen to them and that turned out to be the right decision.”

Huawei, founded in 1987, has grown from a small seller of phone switches in rural China to the world's largest maker of telecommunications equipment. It has come under increased scrutiny in recent times amid U.S. efforts to curb its business.

Urban to Rural

In terms of gas use, there is precedence in other countries. Consumption tends to take off in large population centers first, then expand to smaller cities and rural regions, Liu said this week from the company's headquarters in Shenzhen, where Huawei is also based. That has been the case in Europe and North America, and China will be no exception, according to Liu. Rural incomes have also improved in the past 10 years, he added.

Gas consumption is booming as the government seeks to combat pollution. State-ordered replacements of coal-fired boilers with natural gas furnaces have spawned an increase in demand for services provided by distributors such as China Gas, ENN Energy Holdings Ltd. and China Resources Gas Group Ltd.

This has come in spite of a slowdown in the world's second-biggest economy. While figures showed China slowing to a record-low pace in the second quarter amid the trade war with the U.S., natural gas consumption rose 11% on-year in the first half following an 18% increase in all of 2018 and 15% the year before.

“Our growth mostly has energy and environmental policies to thank,” Liu said, adding that China's economic expansion in previous decades was powered by coal. “The trade war will definitely have a negative impact on China's economy in the long term. But China's gas distribution business could be the least affected as consumption growth comes mainly from environment protection policies.”

New Demand

A sustained push for coal-to-gas projects in urban areas and towns could create an additional 140 billion cubic meters of gas demand in the next 10 years, Liu estimates. That will help China achieve a goal to raise the share of natural gas in its energy consumption mix to 10% and 15% by 2020 and 2030, respectively. It's currently at about 7%.

The industry will also get a boost from the creation of a national pipeline company, which is expected later this year. That promises fairer access to pipeline infrastructure, which may increase diversity of suppliers and spur development of regional networks. This will help lower costs and support China Gas' rural ambitions, Liu said.

With gas demand expanding rapidly, the company has to ensure sufficient supply. It's seeking to restart talks on a non-binding deal with U.S.-based Delfin LNG LLC for liquefied natural gas. Negotiations have stalled due to the trade dispute, and China Gas is awaiting a resolution between the two nations. Under a 2017 agreement, Delfin is to supply China Gas with 3 million tons annually for 15 years from 2021.

There are other factors at play as to whether the deal can progress, Liu said. The companies have to sort out details on prices, delivery method and assess if Delfin is able to build export facilities in time. More infrastructure is needed before large-scale exports are possible, according to Liu.

“U.S. is a big gas-producing country, but its exporting facilities are inadequate,” Liu said. “Obviously we want to diversify our sources of gas supply and are happy to see more channels to import from around the world so as to lower our costs.”

Besides Delfin, China Gas has been approached by companies from the Middle East and Russia, as well as large international explorers, about new deals, Liu said. Talks with several LNG suppliers are ongoing, he added.

To contact the reporters on this story: Selina Wang in Beijing at swang533@bloomberg.net;Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Jasmine Ng, Jason Rogers

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