Fitch Ratings has affirmed China Resources Gas Group Limited's (CR Gas) Long-Term Issuer Default Rating (IDR) at 'A-'.
The Outlook is Stable. The agency has also affirmed CR Gas's 'A-' senior unsecured rating.
CR Gas's IDR reflects its 'a-' Standalone Credit Profile (SCP), underpinned by its position as a leading nationwide city-gas distributor with stable quasi-regulated earnings, strong geographic diversification with large exposure to higher-tier cities, competitive gas procurement strategies, and strong financial discipline, combined with very healthy credit metrics. We expect CR Gas to sustain a strong balance sheet despite high procurement cost and heavy capex. We estimate EBITDA net leverage to stay at around 1.3x in 2023-2026.
CR Gas's IDR will remain unchanged, even if the SCP deteriorates to 'bbb+', reflecting our assessment of 'Medium' operational and strategic incentives for its 61% parent, China Resources Holdings Limited (CRH), to provide support under Fitch's Parent and Subsidiary Linkage Rating Criteria.
Key Rating Drivers
Rebounding Volume Growth: Fitch expects CR Gas's 2023 gas sales volume growth to reach 10% from 5% in 2022, due to a rebound in commercial and industrial (C&I) gas usage after the lifting of pandemic restrictions. CR Gas's strong acquisitions in 2022 will also contribute to volume growth. We estimate its gas sales volume rose by 13% yoy on average in 2018-2022, following active, albeit prudent, acquisitions and strong gas demand in its concession areas, mostly in wealthier, densely populated cities, including provincial capitals.
Recovering Dollar Margin: We expects dollar margin in 2023 to rebound to CNY0.5 per cubic metre (cbm) from CNY0.45/cbm in 2022, given better cost pass-through for residential users, larger contribution from the higher-margin C&I users, lower spot gas prices, and more contracted gas purchased at lower costs.
In 2022, CR Gas's dollar margins narrowed by CNY0.07/cbm, due to a surge in gas prices, and higher contribution from low-margin residential users. Residential sales made up 24% of total sales in 2022, compared with 22% historically, as a result of the Covid-19 outbreak last winter, while cost pass-through in residential tariff was largely suspended in 2022 due to the pandemic. Fitch estimates that these factors and lower volume growth resulted in a 5% decrease in CR Gas's gas segment EBITDA in 2022.
High EBITDA Growth: We expect double-digit growth in EBITDA in 2023, driven by higher dollar margins and gas sales volume, before growth stabilises at a high single-digit rate over the medium term. Apart from gas sales, future EBITDA growth should also be supported by higher contribution from integrated energy and extended gas services, which we estimate may more than double from the 2022 level by 2026. We also expect dividends from newly acquired joint ventures, including the Hefei municipal gas project, to boost CR Gas's cash flow over the medium term.
Lower Contribution from Connections: We expect gas connections, which rose to 4.1 million in 2022 as local governments pushed CR Gas to speed up work to ensure swifter delivery of new homes, to normalise to 3.5 million in 2023. Annual connections beyond 2023 may gradually fall towards 3 million given China's weakening new housing-development sector, although this may be partly offset by contribution from newly acquired projects and demand from old-town renovation projects.
We estimate EBITDA contribution from gas connections will drop by 11pp to less than 18% in 2026, as other segments expand faster. Fitch expects this change to the segment mix to be positive for cash flow stability, as connection fees are non-recurring by nature.
Low Leverage Despite High Investments: We expect cash capex and acquisitions to fall from the 2022 peak, but remain above the pre-2022 levels of HKD8 billion-9 billion (2022: HKD15 billion), due to the expanding asset base, potential consolidation opportunities and LNG terminal construction. This is likely to keep free cash flow after acquisitions and investments in affiliates negative up to 2025 despite strong earnings growth. We expect EBITDA net leverage to stay low at 1.1x-1.4x in 2023-2026 (2022: 1.6x), with a declining trend as new earnings from heavy investments kick in. Rating headroom should stay ample.
Derivation Summary
CR Gas has one of the strongest financial profiles of rated Chinese city-gas operators. We consider Kunlun Energy Company Limited (A/Stable) as CR Gas's closest peer, in light of their similar business profiles as large city-gate gas operators with national outreach.
Kunlun has a procurement-cost advantage as a subsidiary of China National Petroleum Corporation (A+/Stable), with stronger vertical integration and lower exposure to the one-off connection business, while CR Gas has greater exposure to high-tier markets, with stronger demand growth potential and smooth pass-through. Both expect low leverage over the medium term.
Key Assumptions
Growth rate of gas sales volume on a consolidated basis to outperform China's national average by 4pp-6pp in 2023-2026
Dollar margin to rebound to CNY0.5/cbm by 2023; minor expansion over the medium term
Household connection additions at 3 million-3.5million per year in 2023-2026
The new LNG terminal to commence operation in 2026 in the form of a joint venture
Annual investments, including capex, acquisitions and injections in joint ventures and associates, to stay at HKD8 billion-9 billion per year
Common dividend pay-out to rise over the medium term
FX rates per Fitch's Global Economic Outlook
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A higher internal assessment of CRH's credit profile, provided CRH's incentives to support CR Gas remain intact
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A weakened SCP, evident from net debt/EBITDA above 2x for a sustained period, and weakened incentives for CRH to support CR Gas
Material deterioration of our internal assessment of CRH's credit profile
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Solid Liquidity: CR Gas reported HKD6.4 billion in cash against short-term debt of HKD7.7 billion (excluding internal loans) at end-2022. Liquidity is further supported by diversified funding channels, including HKD21.1 billion of undrawn bank facilities at the holding company level. We expect CR Gas's debt profile to continue to be dominated by bank facilities. Such structure presents higher resilience against capital-market volatilities.
Issuer Profile
CR Gas is a leading city gas distributor in China with nationwide coverage. It is 61.47% owned and controlled by CRH, which is wholly owned by China's State-owned Assets Supervision and Administration Commission.
Summary of Financial Adjustments
Fitch adjusted HKD2.3 billion of amounts due to fellow subsidiaries, HKD2.5 billion of amounts due to an intermediate holding company and HKD110.6 million of amounts due to joint ventures, from short-term payables to short-term debt.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
CHINA RESOURCES GAS GROUP LIMITED 
