China Doubling Gas Use Makes Ex-Clothing Retailer Target

China Gas Holdings Ltd., the utility that began life as an online retailer, has become the industry’s hottest property as China plans to double use of natural gas and replace coal in the biggest-polluting nation.

The company, a seller of subsidized gas in canisters and pipelines to 151 cities, gained 38 percent since receiving a hostile bid in December, valuing it at HK$15.3 billion ($2 billion). Some of its biggest Chinese and Korean stockholders increased their stakes after the offer, pushing its market value up to HK$17 billion and creating a contest for control of a utility that last year was mired in an embezzlement scandal and a decade ago sold clothing on the web.

The emergence of China Gas shows how some of Asia’s largest energy companies plan to exploit China’s goal to double the share of gas in its energy mix by 2015, and possibly let prices of the commodity rise toward a market level. While China Gas trails peers in profitability by returning 2.3 percent on assets, its pipeline grid serves more cities than any other.

“China Gas provides a vast pipeline network and concession rights, which would be a solid base for future growth,” said Shi Yan, a Shanghai-based analyst at UOB-Kay Hian Ltd. “If investors miss this opportunity they would lose the chance to control a major Chinese utility.”

Defeated for now is state-owned China Petroleum & Chemical Corp., known as Sinopec, the nation’s biggest oil refiner, with a $94 billion market value. Sinopec joined the $2 billion hostile bid led in December by one of China Gas’s closest competitors, ENN Energy Holdings Ltd.

Crowded Out

Sinopec and ENN were crowded out by three of China Gas’s largest investors, who paid as much as 17 percent above the HK$3.50-a-share offer price to buy stock as they vie for a dominant position in the utility. China Gas fell 7 cents to close at HK$3.80 in Hong Kong today.

The trio -- which includes a group led by Fortune Oil Plc of Hong Kong, city government-owned Beijing Enterprise Group and South Korea’s SK Holdings Co. -- increased their combined stake in China Gas to about 47 percent as of yesterday.

“It was a fight between insiders and outsiders at the beginning, and now looks more and more like a competition among insiders who want to grab as many shares as possible before a final showdown,” said Shi, the analyst at UOB-Kay Hian.

Pipeline Network

At stake is access to a 61,000-kilometer (38,000-mile) pipeline network -- similar in length to Kinder Morgan Inc.’s prior to its acquisition of El Paso Corp. -- and 6.64 million customers. China Gas’s latest full-year return on assets of 2.3 percent is the second-lowest of the seven-member MSCI Emerging Markets Gas Utilities Index. PT Perusahaan Gas Negara of Indonesia leads the index, with a 19 percent return on assets.

Investors are attracted by the advent of China loosening its price cap on gas, and by China Gas’s booming market. The company led its peer group with one-year and five-year sales growth of 55 percent and 76 percent a year, respectively, compared with the median growth of 30 percent and 23 percent.

“China Gas’s resources are unique and enjoy the kind of competitive advantage few others can match,” Bill Mok, chief financial officer of Fortune Oil, said in a May 10 telephone interview. “It’s almost impossible to build utility networks across more than 150 cities in China today. There are so many investment rules, personnel and legal issues deterring companies from even thinking about joining the utility business.”

Fortune Oil

The Fortune Oil group held 17.32 percent of the utility as of May 8, making it the largest stakeholder. Partners include China Gas Group Ltd., Fortune Oil’s venture with China Gas Holdings’ former Managing Director Liu Ming Hui, and Fortune Max Holdings Ltd., controlled by Fortune Oil Vice Chairman Daniel Chiu.

Liu was removed from China Gas’s board last year after he and another company executive were detained by Shenzhen police in December 2010 in connection with allegations of embezzlement. Liu was later released without being charged.

The stock, trading 8.6 percent above ENN and Sinopec’s offer, would fall if the bidders walk away, and the decline would be an opportunity to buy more shares, Mok said.

The gas supplier evolved out of a fashion retailer called Ltd., which was renamed Hai Xia Holdings Ltd. in 2001 and then China Gas Holdings the following year when it began to acquire natural-gas assets in China. The company currently counts the U.K.’s Jupiter Asset Management Ltd. and Belgrave Capital Management Ltd. among its investors, according to data compiled by Bloomberg.

Gas Sales

The company now sells gas to 6.6 million residential customers and about 42,000 industrial and commercial users, and owns 112 natural gas refilling stations, according to its results for the six months through September. In that period China Gas generated about 43 percent of its revenue from sales of piped natural gas, and another 39 percent from liquefied petroleum gas that is sold in canisters.

The Fortune Oil executive said his group will consider increasing its stake and seeks to keep it below the 30 percent threshold that would trigger a requirement to make a mandatory offer for the remaining shares. The consortium isn’t linked to Beijing Enterprises Group and other shareholders, Mok said.

Beijing Enterprises Group more than quadrupled its shareholding this month, giving it a 14.75 percent stake as of May 15. The company is owned by the Beijing Municipality and is the parent of Beijing Enterprises Holdings, which supplies gas in the Chinese capital.

“Beijing Enterprises Group itself is interested in taking over China Gas, in case Sinopec and ENN’s bid doesn’t succeed,” Jefferies Hong Kong Ltd. analysts Rong Li, Joseph Fong and Christie Ju wrote in a May 7 research note. “According to Beijing Enterprises Holdings, its parent sees the China Gas stake as a valuable investment.”

Beijing Enterprises Group

A woman who answered the phone at Beijing Enterprises Group’s headquarters said the company’s spokesman wasn’t available for comment. She declined to identify herself or name the spokesman.

SK Holdings, South Korea’s third-largest industrial group, owns 672 million shares through two units, giving it a 15.33 percent stake, according to a Feb. 29 filing.

“We are a long-term strategic investor in China Gas and expect the country’s gas distribution market to provide business opportunities,” SK E&S Co. said in a May 8 e-mail. “China Gas has growth potential,” the SK Holdings unit said, declining to comment on share purchases by other investors.

With China Gas’s market value down 25 percent to HK$12.3 billion in the 12 months before its shares were halted on Dec. 7, ENN and Sinopec bid HK$14.6 billion for 95 percent of the company. They said a combination would increase ENN’s share of the natural gas distribution market and allow Sinopec to expand its businesses.

Opportunistic Bid

Sinopec is Asia’s biggest oil refiner and already owns 5 percent of China Gas.

China Gas rejected the bid, saying it was opportunistic and failed to reflect the company’s value. Sinopec and ENN on April 30 extended the deadline for the acquisition to July 6. An external spokesman for the bidders declined to comment when reached by telephone.

The bidders have extended their acquisition deadline twice as they wait for regulatory approvals. Both companies have said their offer is fair. A price higher than the market valuation can’t be paid, Fu Chengyu, chairman of Sinopec, said March 26.

“If competitors can buy China Gas they can have more footprint in China,” Masahiko Ejiri, a senior fund manager in Tokyo at Mizuho Asset Management Co., which oversees $39 billion. “Natural gas distribution will be a growth business.”

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