What happened
We expect PetroChina to raise national non-residential gas prices byfor base volume by 20% and for peak-shaving volume by over 30%,effective September 1. This marks the beginning of the winter gasprice hike cycle, and it comes earlier and larger than last year, whenprices did not rise until late October.
Replacing our old assumptions （a 15% increase for 2 months） with thenew ones, this year’s winter gas price hike lifts our FY18E earningsestimate by Rmb7.0bn or 12%, quite a significant uplift.
Comments
Winter gas price hike earlier and bigger this year. Apart from beingadvanced to early September （from late October last year）， this year’sprice hike is also much larger （20% for base volume, over 30% forpeak-shaving volume, and easily over 50% for volume beyondcontract, vs. an overall increase of 11–12% last winter）。 In short, thisyear’s gas price hike exceeds market expectations in terms of bothmagnitude and length of period.
Storage still lags. We believe China’s gas storage is still massivelyunder capacity, thus it is unrealistic to count on a storage ramp-up tofix winter gas shortage issues.
Price hikes the only solution to winter gas shortage. With gas importcosts rising on a weakening renminbi and higher oil prices, we believehigher gas prices are needed to incentivize gas suppliers. Based onthe NDRC formula, the domestic city gate price needs to rise 30% tomark to market today’s nearly US$80/bbl price of oil.
Price hike does not violate NDRC 20% cap. The NDRC’s 20% cap onnon-residential gas price hikes only applies to domestically producedonshore gas and pipeline gas imports with deals signed before 2014.
For everything else （offshore gas, LNG imports and unconventionalgas）， pricing has been deregulated. We estimate the NDRC city gateprice cap applies to less than 60% of China’s gas supplies.
Not just a seasonal hike, but the beginning of a structural upturn.
Unlike previous years, we believe this year’s increase marks thebeginning of an upturn in China’s gas price cycle.
Risks
Oil prices; policy execution on gas price increases