Hong Kong and China Gas : Preliminary Announcement of 2019 Interim Results

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香 港 中 華 煤 氣 有 限 公 司

THE HONG KONG AND CHINA GAS COMPANY LIMITED

(Incorporated in Hong Kong under the Companies Ordinance with limited liability)

(Stock Code: 3)

PRELIMINARY ANNOUNCEMENT OF 2019 INTERIM RESULTS

HALF-YEARLY RESULTS

The Directors wish to report that the unaudited profit after taxation attributable to shareholders of the Group for the six months ended 30th June 2019 amounted to HK$3,889 million, a decrease of HK$900 million, down by 18.8 per cent, compared to the same period last year. Earnings per share for the first half of 2019 amounted to HK23 cents. Exclusive of the Group's share of a revaluation surplus from an investment property, the International Finance Centre complex, the Group's profit after taxation amounted to HK$3,752 million, a decrease of HK$211 million, down by 5.3 per cent, compared to the same period last year.

Highlights of the unaudited results of the Group for the six months ended 30th June 2019, as compared to the same period in 2018, are shown in the following table:

	Unaudited
	Six months ended 30th June
	2019	2018
Revenue before Fuel Cost Adjustment, HK million dollars	19,924	18,744
Revenue after Fuel Cost Adjustment, HK million dollars	20,352	19,242
Profit Attributable to Shareholders, HK million dollars	3,889	4,789
Earnings per Share, HK cents	23.0	28.3*
Interim Dividend per Share, HK cents	12	12
Town Gas Sold in Hong Kong, million MJ	15,776	16,158
Gas Sold in mainland China City-gas Business,	12,945	11,469
million cubic metres; natural gas equivalent#
Number of Customers in Hong Kong as at 30th June	1,920,595	1,890,415
Number of City-gas Customers in mainland China	28,517,205	26,469,561
as at 30th June#

• Adjusted for the bonus share issue in 2019

• Inclusive of all mainland city-gas projects of the Group

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TOWN GAS BUSINESS IN HONG KONG

Local economic growth slowed during the first half of 2019. During the period under review, gas sales in the restaurant sector decreased compared to the same period last year. Additionally, as the average temperature in Hong Kong during the first half of 2019 was higher than the same period last year, this also affected gas sales. Total volume of gas sales in Hong Kong for the first half of 2019 was approximately 15,776 million MJ, a decrease of 2.4 per cent, in contrast to a 7.1 per cent increase in the number of appliances sold, both compared to the same period last year.

As at 30th June 2019, the number of customers was 1,920,595, an increase of 12,084 since the end of 2018.

The Company raised its standard gas tariff by HK1.1 cents per MJ on 1st August 2019. The actual increase in the gas tariff (comprising standard tariff and fuel cost adjustment) is equivalent to 4.4 per cent. The Company commits to keeping this new standard gas tariff frozen for the next two years.

BUSINESS DEVELOPMENT IN MAINLAND CHINA

The Group's mainland businesses continued to progress steadily during the first half of 2019. Overall, inclusive of projects of the Group's subsidiary, Towngas China Company Limited ("Towngas China"; stock code: 1083.HK), the Group currently has 260 projects on the mainland, six more than at the end of 2018, spread across 26 provinces, autonomous regions and municipalities. These projects encompass upstream, midstream and downstream natural gas sectors, water sectors, efficient energy applications and exploration and utilisation of emerging environmentally-friendly energy, as well as telecommunications.

The Group's development of emerging environmentally-friendly energy businesses in mainland China, including coalbed methane liquefaction, coal chemicals, conversion and utilisation of biomass, utilisation of industrial and agricultural waste as well as natural gas refilling stations, through its wholly-owned subsidiary ECO Environmental Investments Limited and the latter's subsidiaries (collectively known as "ECO"), is progressing steadily. ECO's in-house research and development of innovative technologies is also progressing well with a number of achieved results gradually being applied commercially. Gradual commissioning and development of related projects are expected to contribute to the long-term business growth of the Group.

Diversification and an increase in the number of projects have gradually transformed the Group from a locally-based company in Hong Kong centred on a single town gas business a number of years ago into a sizeable, nationwide, multi-business corporation focused on environmentally-friendly energy ventures and utility sectors.

UTILITY BUSINESSES IN MAINLAND CHINA

The Group's city-gas businesses are progressing well. Inclusive of Towngas China, the Group has a total of 131 city-gas projects in mainland cities spread across 23 provinces, autonomous regions and municipalities. The total volume of gas sales for these projects for the first half of 2019 was approximately 12,940 million cubic metres, an increase of 13 per cent over the same period last year. As at the end of June 2019, the Group's mainland gas customers stood at approximately 28.52 million, an increase of 8 per cent over the same period last year. The Group has a good reputation as a large-scalecity-gas enterprise with outstanding overall performance on the mainland.

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The mainland economy faced uncertainties across different aspects due to international trade tensions during the first half of 2019, resulting in economic slowdown compared to the same period last year. This, coupled with weakness of the renminbi, has adversely affected the Group's mainland businesses. Although exports have been impacted by the unfavourable international business environment with some export-oriented enterprises starting to move to Southeast Asian countries, rising per capita income of urban and rural residents continued to drive domestic consumer spending during the period, helping to sustain an industrial manufacturing base, thus boosting the country's demand for energy. The government advocates the use of natural gas to reduce air pollution and improve smoggy atmospheric conditions. To this end, a natural gas utilisation policy has been formulated to strengthen preventative measures to combat air pollution and speed up the use of natural gas to replace coal across the country. Substituting piped natural gas for bottled petroleum gas is also being encouraged nationwide, thus facilitating the development of city-gas businesses, whilst greater use of household heating in the Yangtze River Basin is raising residential gas sales there. The government is also promoting distributed energy systems by advocating partial replacement of coal-fired power with natural gas. In addition, the national policy of removing the requirement for Chinese partners to hold a majority stake in certain industries, including city-gas and thermal pipeline networks, in cities with populations of more than 500,000 effective from 30 July 2019 will help open up related markets. This favourable momentum will continue to benefit the Group's city-gas and natural gas businesses in the future.

The Chinese government has been making strong efforts to drive market-oriented reforms for the natural gas industry in recent years. The "Guiding Opinion on Strengthening Gas Distribution Price Regulation" and the "Guiding Opinion on the Regulation of Installation Fees for Gas Facilities in Cities and Towns" published in 2017 and June 2019, respectively, by the National Development and Reform Commission have set out proposed return rates for both gas distribution and gas facility installation businesses of city-gas enterprises, while the rates of gas prices and installation fees for end users of piped gas are now to be determined by local price bureaux. In the future, the Group's city-gas project companies might be subject to the risk of having to adjust their natural gas selling prices and gas facility installation fees accordingly, thus creating uncertainties for the Group both operationally and financially. In view of the above, our management team is actively monitoring and evaluating the changes in policies and will take appropriate measures to address any potential risks.

As natural gas is being promoted as a major clean energy on the mainland, long-term and steady growth in market demand is anticipated. In view of this, the country is striving to maintain an ample supply of natural gas. Supplies of natural gas are gradually becoming abundant with a gradual increase in imported piped natural gas from Central Asia and Myanmar and a rise in the sources of imported liquefied natural gas ("LNG"), both to the benefit of market development. In addition, Russia's Siberian east-route pipeline, which is scheduled for commissioning before the winter period of 2019, is expected to increase upstream gas sources for the Group's city-gas projects in northeastern and eastern China. A number of mainland provinces and cities are also gradually laying plans to develop gas storage facilities to help boost capacity over winter alongside the construction of coastal LNG receiving stations. All these projects will contribute to a stable supply of natural gas, helping the Group's mainland city-gas businesses to continue to thrive in the future.

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In line with the Chinese government's policy of advocating faster development of gas storage capacity, the Group is actively enhancing its own gas storage capacity on the mainland. Construction of the Group's natural gas storage facility in underground salt caverns in Jintan district, Changzhou city, Jiangsu province, is progressing in phases. This project is the first of its kind built by a city-gas enterprise on the mainland. Phase one involves the construction of 10 wells, with a storage capacity of approximately 460 million standard cubic metres; the first three wells were commissioned at the end of October 2018. During the second quarter of 2019, as initiated by the Group, Shanghai Gas (Group) Co., Ltd., a company possessing LNG receiving stations, joined phase one of the project to help facilitate the import of LNG resources from overseas. Phase two, wholly-owned by the Group, involves the construction of 12 wells with a storage capacity of 560 million standard cubic metres. Upon completion, total storage capacity of the whole facility will be over 1 billion standard cubic metres, enabling the Group to supplement and regulate gas supply during the peak winter period for a number of its city-gas projects in eastern China. In the longer term, it is planned that this facility will supply gas to the Group's city-gas projects in other regions through interconnected upstream pipeline networks, thus assisting the Group's business development in downstream city-gas markets.

The Group has been in the mainland water market, under the brand name "Hua Yan Water", for over 13 years and currently invests in, and operates, seven water projects. These include water supply joint venture projects in Wujiang district, Suzhou city, Jiangsu province and in Wuhu city, Anhui province; wholly-owned water supply projects in Zhengpugang Xin Qu, Maanshan city and in Jiangbei Xin Qu, Wuhu city, both in Anhui province; an integrated water supply and wastewater treatment joint venture project, together with an integrated wastewater treatment joint venture project for a special industry, both in Suzhou Industrial Park, Suzhou city, Jiangsu province; and a new water services joint venture project in Foshan city, Guangdong province added in the fourth quarter of 2018 through investment in Foshan Water Environmental Protection Co., Ltd. The major businesses of this latter company encompass tap water supply, wastewater treatment and municipal environmental and sanitary engineering. This is the Group's first water services project located in the Guangdong-HongKong-Macao Greater Bay Area. In tandem with the country's promotion of the development of the Greater Bay Area, investment in this project is expected to provide opportunities for the Group to develop water services and environmental protection businesses within the region. In addition, given food waste processing and utilisation is also a sizeable environmentally-friendly industry, the Group has constructed a plant in Suzhou Industrial Park to handle 500 tonnes daily of food waste, green waste and landfill leachate for conversion into natural gas, oil products, solid fuel and fertilizers under the "Hua Yan Water" brand; trial production formally commenced in mid-February 2019 and is the Group's first project converting municipal environmental and sanitary waste into value-added products. Projects of this kind will gradually be extended to other affluent mainland regions.

Operation and management of businesses encompassing city-gas, midstream natural gas, city-water and municipal environmental and sanitary waste processing and utilisation projects are creating ever-greater synergy and mutual advantages. Furthermore, these businesses generate stable incomes, provide good environmental benefits and exhibit high growth potential. The Group will therefore keep on looking for opportunities to invest in high-quality utility projects on the mainland.

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EMERGING ENVIRONMENTALLY-FRIENDLY ENERGY BUSINESSES

ECO's major businesses in Hong Kong - an aviation fuel facility, dedicated liquefied petroleum gas ("LPG") vehicular refilling stations and landfill gas utilisation projects - are all operating well, contributing to ECO's steady profit growth. ECO's aviation fuel facility recorded a total turnover of approximately 3.3 million tonnes of aviation fuel during the first half of 2019, a similar level to the same period last year. ECO's landfill gas utilisation projects in the North East New Territories and the South East New Territories generate noticeable environmental benefits by avoiding in-situ burning and emission of landfill gas and enabling partial replacement of fossil fuels, thus increasing the Group's contribution to energy conservation and emission reduction in Hong Kong.

As the mainland's demand for natural gas as a major clean energy continues to increase, there is a rising need for using LNG as a gas supplement during winter. In relation to this, ECO's coalbed methane liquefaction facility, located in Jincheng city, Shanxi province, is operating smoothly, seeing an increase in the upstream supply of coalbed methane for this facility.

The overall operating environment of ECO's clean coal chemical project in Ordos city, Inner Mongolia Autonomous Region, worsened noticeably during the first half of 2019 compared to the same period last year due to a significant fall in the selling prices of methanol and ethylene glycol caused by a reversal of the external economic environment; as a result, ECO is now adjusting its development strategy in response to this changing external environment.

Conversion of biomass into clean energy and chemical products is one of ECO's major business strategies, which is also in line with the policy direction of mainland China. To this end, after several months of trial operations, ECO's integrated processing project, located in Zhangjiagang city, Jiangsu province, using its self-developed technology to process inedible bio-grease feedstock into hydro-treated vegetable oil ("HVO"), has produced a total of nearly 20,000 tonnes of HVO, which has gained "International Sustainability and Carbon Certification" (ISCC). On this basis, ECO has commenced phase two of the project to enhance production capacity to 180,000 tonnes per annum. HVO as an advanced biofuel can achieve noticeable reduction in the carbon emission. This project will generate promising economic benefits, and will be the key business to develop.

Mainland China is a sizeable agricultural production country generating a large quantity of agricultural waste every year. Apart from using a small portion of this in fields or for power generation, there are currently no effective measures to make good use of the rest of this waste. ECO has commenced construction work relating to a pilot project in Tangshan city, Hebei province, to apply self-developed hydrolysis technology to break down agricultural straw into hemicellulose, cellulose and lignin and to yield furfural and paper pulp. Both are used for chemical feedstock and basic materials and have noticeable economic and environmental benefits. This pilot project is expected to be commissioned by the end of 2019 and, if successful, will enable ECO to build facilities in mainland regions abundant with straw resources and develop a broad green and low-carbon business eco-system.

ECO's in-house scientific research, focusing on the extraction of high-quality carbon materials from the pitch portion of high-temperature coal tar oil, has achieved promising results, successfully producing high-quality activated carbon and mesophase pitch. High-quality activated carbon can be used for making super capacitors, whereas mesophase pitch can be used as a raw material for carbon fibre or as an anode material for batteries. Given prevailing trends for new energy electric vehicles and rail transport electrification in mainland China, prospects for these new carbon materials are promising. ECO's first pilot project of this kind is now at the preparatory stage; construction work is expected to commence in the second half of 2019.

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