China Oil And Gas Group Limited (603) Earnings Call Transcript & Summary

Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. Sophia, please begin your call, and I'll be standing by. Thank you.

Okay.

Please go ahead, ma'am.

Ladies and gentlemen, this is Sophia Xu, Investment Department Manager. On behalf of China Oil And Gas Group Limited, it is with pleasure for me to welcome you all to our 2021 interim results conference call today. I will present the group's 2021 interim results and our CFO, Ms. Shan Yin Law, will answer any questions you may have after the presentation. Our presentation material for today has been uploaded to our website at www.hk603.hk under Investor Relations and then Roadshow Presentations or you can also access through the link attached in our announcement e-mail from yesterday. We will first talk about the financial highlights and performance of the group followed by the operating performance of our core business, natural gas distribution business and then our upstream oil and gas production business in Canada. The presentation will take around 20 minutes, and we will have a Q&A session at the end. First, let's start with the financial performance. On Page 3, it summarizes the major highlights of the group for the first half of 2021. As several COVID-19 vaccines became available and popularized, the economies of various countries recovered. All aspects of our group has also returned to the right track with the resumption of work and production in Mainland China. In the first half of 2021, the total turnover was HKD 6.953 billion, a year-on-year increase of 49.4%. The main reason was the increase in group's natural gas sales volume and upstream oil prices. Natural gas sales rose 20% year-on-year to 2.425 billion cubic meters compared with 2.019 billion cubic meters in the same period last year. Gross profit rose 58.1%. Profit for the period was HKD 667 million, a year-on-year increase of 56.6%. Profit attributable to company owners was HKD 310 million, a year-on-year increase of 63.2%. Earnings per share increased 56.6% to HKD 0.06025. On Page 5, after deducting one-off items, the profit attributable to company owners increased by 77.1%. Page 6 and 7. The group's principal activities are divided into 4 segments, namely, sales and distribution of natural gas and other related products, gas pipeline construction and connection, exploitation and production of crude oil and natural gas and a newly added production and sales of coal gasification and other related products. Revenue was at HKD 5.995 billion, HKD 431 million, HKD 223 million and HKD 303 million, respectively, representing an increase of 43.1%, 28.7% and 66%, respectively. The gross profit margin of the segment sales and distribution of natural gas and other related products was the same as last year. In order to enhance the market competitiveness of the gas pipeline construction and connection business, the gross profit margin of this segment was reduced to 41%. Due to the slower recovery of global crude oil supply versus demand, crude oil prices have risen, and the gross profit margin of the exploitation and production of crude oil and natural gas has increased from 7% in the same period last year to 50% this year. Page 8. Group's EBITDA increased 46% to HKD 1.247 billion. On Page 9, the total assets of the group are HKD 22.856 billion, an increase of 19% from the HKD 19.27 billion at the end of 2020. The net assets are HKD 8.092 billion, an increase of 10% from the end of 2020. On June 23, 2021, the group successfully issued an additional USD 400 million 5-year senior notes with a coupon of 4.7%. We redeemed the USD 350 million senior notes due in 2020. The group completed the early redemption on August 2, 2021. As of June 30, 2021, the group's total debt, including bank borrowings, other borrowings and senior notes, was HKD 10.643 billion. As of December 31, 2020, it was HKD 7.749 billion. Cash and cash equivalents and the time deposit were HKD 6.497 billion compared with HKD 3.763 billion at the end of last year. The increase in total debt and cash is mainly due to the USD 400 million senior bond that was booked before June 30, but the USD 350 million bond has not yet been redeemed at that point. The group's net debt to asset ratio, which was calculated by total debt minus cash and time deposits divided by total assets, is 19.1% versus 20.7% last year. Finance costs, net of capitalization, was similar to the same period last year at HKD 123 million. The weighted average cost of all debt of the group was 4.44% compared with 5.26% in the same period last year. The main reason was that China Petroleum Finance Corporation gave the group an interest discount. For the 6 months ended June 30, 2021, the group's net cash generated from operating activities was HKD 640 million, a 17% year-on-year increase compared with HKD 548 million in the same period last year. Now let's get into operating performance of the group on Page 11 and 12. The group's total gas sales in the first half of the year increased by 20% year-on-year and residential gas consumption was the same as the previous year. Gas consumption by industrial and commercial users increased by 28.6%. Gas sales at gas stations increased by 26.9%. Page 13. The proportion of gas sales by various users is relatively stable. Industrial and commercial users account for 66% of the gas sales. Residential users account for 26%. And the gas station sales is 8%. Page 14. The group's gas sales volume in Shanxi and Jiangsu recorded significant growth, resulting in a decrease in the proportion of other provinces. Page 15. The blended dollar margin is RMB 0.45 per cubic meter, an increase of RMB 0.01 from 2020. Page 16. In the first half of 2021, the group connected more than 84,000 new residential users, an increase of 29% year-on-year. And the cumulative connection of residential users was approximately 1.7 million. 528 new residential and commercial users were connected. And the cumulative number of industrial and commercial users connected reached 14,847. Page 17. During the period, the group managed to land 1 concession right project, namely the Jixian Industrial Cluster gas concession right project in Linfen, Shanxi Province. The group also added 1 new branch pipeline project in Guizhou Province. In July 2021, the group successfully launched the merger and acquisition of Shandong Shengli. Shandong Shengli Co., Ltd., namely Shengli, is a company listed by the shares established in the PRC, and its issued shares are listed and traded on main board of the Shenzhen Stock Exchange in accordance with the regulations. Stock code 407.SZ. Shengli has extensive business resources in the natural gas field. The group extends -- intends to cooperate in depth with Shengli to promote the sustainable and high-quality development of the group and is in the interest of the company and its shareholders as a whole. In August 2020, the group announced its intent to acquire a total of 17.19% shares of Shengli. Page 18. Up to now, the group has 73 city gas concession rights in 16 provinces in China and had 64 LNG and CNG stations. Let's go to Page 20 and talk about upstream business. In the first half of 2021, the upstream oil and gas production business achieved an average output of 4,966 barrels of oil equivalent per day. The group achieved an average crude oil price of CAD 72.28 per barrel of oil equivalent, an increase of 75.1% from last year's CAD 41.27 per barrel of oil equivalent. Operating netback increased by 144.9% to CAD 26.54 million per barrel equivalent. Thanks, everyone. That's all for my presentation. Now please allow me to introduce our CFO of our company, Ms. Jenny Law. Please feel free to raise any questions.

[Operator Instructions] Our first question comes from [ Wei Meng Chang ] from Singapore.

Two questions. The first one, you mentioned you get interest discount from China Petroleum. Can you elaborate on that, please? And the second question about Shandong Shengli. Can you provide also more details and the rationale and also what kind of synergies do you expect?

The first question. The discount we get is -- on the interest rate is 3.8%. And for your second question, Shengli is doing the same business as China Oil And Gas group. They have like 15 concession rights. So we can expand our operating area in China to increase our market share.

So the 3.8%, is it like a loan provided by China Petroleum?

Yes. It's our subsidiary.

Okay. And what's the amount of the loan, please?

I think we draw down around RMB 200 million right now.

And for Shengli, where are these concession rights?

The concession rights, 5 of them is in Shandong and then 5 of them is in Hubei and Hunan. And then we still have some in Guizhou.

[Operator Instructions] Our next question comes from [ Josh Lin Chen ] from [indiscernible].

Just a couple of questions. I think on Slide 9, there is an increase in gross debt but also noticed an increase in cash and cash equivalent. In that, the net borrowings is only like 4% increase only. I'm not sure if I missed this, but could you clarify on this increase in cash and the gross debt?

The cash and cash equivalent increase is because we have the new U.S. dollar bond -- successfully got the U.S. dollar bond on June 23. So by the end of June 30, this cash is already deposited into our account. And then in June -- in July on the 2nd, we actually redeemed our U.S. dollar bond around USD 350 million. So if you deduct the cash and extra debt we have on our balance sheet, it will balance out. And the increase is just like a slight increase from the last period.

Okay. All right. Okay. Probably I missed that. And on the CapEx, can I understand in terms of the Shengli acquisition, how much are you expecting to pay for this?

The total consideration will be around RMB 784 million.

Okay. And this is for the 17% stake -- if I am not mistaken, 17% stake, right?

Yes, 17.19%.

Okay. Would that be -- okay. So in that case, right, can I understand in terms of your CapEx guidance for this year? Because I think the previous guidance was 1.3 billion, which included some guidance for M&A, but this one is already [indiscernible]. Is there any revised guidance in terms of CapEx?

Yes. The 1.3 billion CapEx before is not -- doesn't include this Shengli acquisition.

Okay. So excluding Shengli, the 1.3 billion will still stand, is it?

Yes.

Okay. And for the CapEx that was spent in first half '21, 700 million, what is the breakdown between gas distribution business and O&G business?

Yes. For the oil and gas business, it is around HKD 100 million, and then the remaining is from our China operation.

Okay. So I guess, the 1.3 breakdown for 1.1 PRC and 700 for O&G will still be the same for the full year.

Yes. Yes.

Okay. The next question is on the gas sales volume. I mean you're doing a very good year-on-year growth for the first half. So is there any revised guidance for the full year gas sales volume for this year?

Yes. The full year growth should be around 15% of sales of natural gas.

Okay. Can I understand, like, Shengli acquisition, right, would that add into your gas sales volume growth in your press, I mean, in your information later? Because it is not a subsidiary. Like how do you report your gas sales volume?

We will just do it separately. Like we can report especially for Shengli how much natural gas it has been sold.

Right. So the 15% sales would really be on the subsidiary only, right?

Yes, not include Shengli.

Okay. And what is the dollar margin? I mean, you're doing a higher dollar margin this first half. What about the full year? What would be the guidance?

The full year will be around the same.

Same as first half, is it?

Yes.

Right. Okay. Can I check on the cash balances that you have? I mean, if I were to exclude all that, what would be the current cash balances now? And then how much is residing in the ListCo and CCNG?

SP05 Around like 25% is on the ListCo level and the remaining is in China. And for CCNG, it constitutes around like 63%, 64%.

63%, 64% of the total cash consolidated...

Yes, after you deduct the cash that we pay redeemed U.S. dollar bond.

How much would that be, sorry, the net after redeeming the U.S. dollar bond?

Yes. You just take out HKD 3 billion.

Okay. Cool. What is the expected dividend from CCNG for FY '21?

Still the same, 50% of their profit, so should be around RMB 100 million to RMB 120 million.

And my last question would be on the dividend policy. I mean there isn't any dividend declared, if I'm not mistaken, for last year. So what is the expectation for this year?

You mean for the ListCo?

Yes, ListCo.

I don't know. It depends on the Board of Directors. Yes. They may have the meeting by the end of this year and decide are they going to pay a dividend or not.

So what is the usual dividend policy otherwise? Is that a dividend policy? Can you remind us?

We didn't pay out a dividend for the past 2 years.

Our next question comes from [ Hai Ling Du ] from [ Principal Global ].

I just wanted to follow up on, firstly, the China Petroleum loan. Is that more of a working capital for operations type of loan?

Yes. Working capital.

Okay. And total is -- you mentioned 200 million is drawn. What is the total size?

I have to check. But approximately RMB 500 million.

Okay. Okay. And that's over, like, 1 year, right, working capital?

Yes.

Okay. revolving type of...

Correct.

Okay. And then on the Shengli, you hold a 17% stake. Who are the other partners in the entity?

Partners? I didn't get your questions. Because we acquired...