The front of the Hong Kong & China Gas Co (Towngas) headquarters in Hong Kong. Compay executives said Friday that Towngas will invest HK$10 billion in the next three years to expand its presence in the new-energy sector on the mainland. Paul Hilton / Bloomberg News

In a major investment move, Hong Kong & China Gas Co Ltd (Towngas) is about to bet on new energy projects on the mainland as the blue-chip utility firm is now earmarking HK$10 billion for investment in the next three years to create its first stronghold in the mainland's new energy market.

Senior management of Towngas attended the annual shareholder meeting on Friday and answered various media enquiries.

"We hope that after the investment outlay, the mainland's traditional natural gas and new energy businesses will contribute 50 percent of the profits for the Group after 2012," said Alfred Chan, managing director of Towngas, adding that the new energy projects include the study of an oil sands project.

Chan added that as the Group's mainland natural gas and new energy businesses become more mature, these two business lines will surpass its Hong Kong business as the main growth engines for the Group after 2012.

"As the new energy projects are still immature, and Towngas possesses adequate capital, the company will not consider separate listing of the new energy project before 2012," Chan added.

Regarding its traditional natural gas business, Chan disclosed that the company's gas sales may rise by 20 percent by volume on the mainland in the next two to three years. Currently, the company has invested in 110 gas projects with more than 10 million customers on the mainland.

"China has overtaken the US as the world's largest consumer country. For the sake of environmental protection, natural gas will still be a key source of energy; hence we are bullish on the natural gas market on the mainland," Chan reiterated.

However, Chan cautioned that the room for price hikes for household users will be limited, as the mainland authority does not want to create too much inflationary pressure in the economy.

The company in March 2010 reported a net profit of HK$5.175 billion for the year 2009, which registered a year-on-year increase of 20 percent.

Financial analysts have a positive view of the company's strategy of unfolding expansion of mainland new energy projects to transform the company business, but cautioned that management expectations may be too optimistic.

"The expansion of mainland new energy depends on many factors; for example, to introduce the oil sands projects, the price of oil has to be above the $80 level; otherwise the projects will not be profitable," Dickie Wong, research manager of Kingston Security told China Daily.

Wong said that the current valuation and dividend yield of Towngas are unattractive compared to those of its peers. As the company transformation will involve too many uncertainties in the next two to three years, he recommended a "natural" stance on the stock.

Investment house Goldman Sachs, in its latest research report, downgraded Towngas to "underperform", reflecting the unattractive valuation and dividend yield figures. Goldman said the stock is trading at 26 times its forecast earnings for this year, while its dividend yield only stands at 2 percent.

The price of Towngas dipped to HK$17.1 on Friday, marginally down by 0.93 percent.

China Daily

(HK Edition 05/29/2010 page3)