Chairman’s Statement
The Year’s Results Profit after taxation attributable Town Gas Business to shareholders of the Group in Hong Kong The Group’s town gas business in for the year increased by 0.53 Hong Kong maintained stable The local economy grew slower per cent to HK$7,341 million, growth in 2016. Global economic in 2016 compared to 2015 amid an increase of HK$39 million fluctuations, slowdown in a challenging global economy. compared to 2015. Earnings economic growth in mainland During the year, tourism was hit per share for the year amounted China, further devaluation of the by a strong Hong Kong dollar to HK57.7 cents. renminbi and low international oil causing a decrease in the total prices during the year, however, During the year under review, the number of inbound visitors for the impacted the Group’s utility and Group invested HK$6,257 million second consecutive year and thus emerging environmentally-friendly in production facilities, pipelines, negatively impacting the food energy businesses on the plants and other fixed assets and beverage gas sales market. mainland. Nevertheless, the for the sustainable development Conversely, as the average Group endeavoured to maintain of its various existing and new temperature in Hong Kong in 2016 stability in its overall recurrent businesses in Hong Kong and was lower than in 2015, residential business results for 2016. mainland China. gas sales increased. Compared to
8 2015, total volume of gas sales in The Group’s development of Utility Businesses Hong Kong for 2016 increased emerging environmentally-friendly in Mainland China by 1.4 per cent to 28,814 million energy businesses in mainland The Group’s city-gas businesses MJ while appliance sales revenue China, including coalbed methane are progressing well. As at the end increased by 24.9 per cent to liquefaction, coal chemicals, of 2016, inclusive of Towngas HK$1,634 million with a total conversion and utilisation of China, the Group had a total of of 275,361 sets sold, mainly biomass, natural gas refilling 131 city-gas projects in mainland benefiting from newly completed stations, etc., through its cities spread across 23 provinces, residential projects. wholly-owned subsidiary ECO autonomous regions and Environmental Investments Limited As at the end of 2016, the number municipalities. The total volume of and the latter’s subsidiaries of customers was 1,859,414, an gas sales for these projects in 2016 (collectively known as “ECO”), is increase of 20,153 compared to was approximately 17,140 million progressing steadily. During 2016, 2015, slightly up by 1.1 per cent. cubic metres, an increase of international oil prices continued 10.3 per cent over 2015. As at the to fluctuate, falling at one time end of 2016, the Group’s mainland Business Development early in the year, to a 2003 low, gas customers stood at approximately in Mainland China leading to a drastic drop in prices 23.1 million, an increase of of energy products which The Group’s mainland businesses 11 per cent over 2015. The Group significantly affected ECO’s profits. continued to progress steadily continues to have a good Nevertheless, ECO’s self- during 2016. Overall, inclusive of reputation as a large-scale city-gas developed innovative technologies projects of the Group’s subsidiary, enterprise with outstanding progressed well in 2016. Gradual Towngas China Company Limited performance on the mainland. commercial application of ECO’s (“Towngas China”; stock code: new technologies is expected to 1083.HK), the Group had Due to uncertainties over the contribute to long-term business 241 projects on the mainland, policy direction of a number of growth of the Group. Additionally, as at the end of 2016, 19 more major global economies resulting international oil prices have than at the end of 2015, spread in poor growth momentum, become more stable since the end across 26 provinces, autonomous demand for commodities of 2016, and this will also help the regions and municipalities. These worldwide remained weak during Group’s income growth. projects encompass upstream, 2016, and, as a result, growth in the mainland economy slowed midstream and downstream Diversification and an increase in compared to 2015. Exports from natural gas sectors, water sectors, the number of projects have mainland China have now declined efficient energy applications and gradually transformed the Group for two consecutive years. Cutting exploration and utilisation of from a locally-based company in excessive capacity, destocking and emerging environmentally- Hong Kong centred on a single deleveraging have also reduced friendly energy, as well as town gas business into a sizable, industrial production. Thus, telecommunications. nation-wide, multi-business demand for energy across the corporation focused on country, including electricity, environmentally-friendly energy petroleum and natural gas, ventures and utility sectors.
The Hong Kong and China Gas Company Limited Annual Report 2016 9 chairman’s statement
recorded only slight growth in and Myanmar, together with a province, is in progress. Upon 2016. Furthermore, given low scheduled supply of piped natural completion, this facility will be international oil prices, prices for gas from Russia, as well as a rise in the first of its kind developed by other petroleum fuels also the sources of imported liquefied a city-gas enterprise on the declined. Nevertheless, in the natural gas (“LNG”), supply of mainland. Total storage capacity medium to long term, as natural natural gas on the mainland is will be approximately 460 million gas is still projected to be the becoming ample, which is standard cubic metres. clean energy of choice to best beneficial to market development. Completion of phase one of this reduce air pollution and improve With a number of mainland cities project, with a storage capacity of smoggy atmospheric conditions gradually advocating the use of 150 million standard cubic metres, on the mainland, long-term and natural gas to replace coal, natural is expected during the second steady growth in demand is still gas as a fuel for household quarter of 2017. This facility, which anticipated. The Chinese heating in winter is steadily will help the Group supplement government has also formulated growing. Thus, with increasing and regulate gas supplies during a natural gas utilisation policy to sources of gas supply, expanding the peak winter period for several strengthen preventative measures pipeline networks, rising living of its city-gas projects in eastern to combat air pollution and to standards and society’s aspiration China, is in line with the Chinese minimise the formation of smog, for greater environmental government’s policy of indicating an energy development protection, the Group anticipates advocating faster development trend inclining towards natural its mainland city-gas businesses of gas storage capacity, and will gas and environmentally-friendly will continue to thrive in future. support the Group’s business energy. The competitiveness of development in downstream Anhui Province Natural Gas natural gas relative to other city-gas markets. Development Co. Ltd., an energy sources was also enhanced associated company of the Group, The Group’s development of following reductions in the was listed on the Shanghai Stock natural gas vehicular refilling mainland’s non-residential natural Exchange on 10th January 2017. stations in mainland China, under gas city-gate prices at the end As a large-scale integrated the brand name “Towngas”, is of 2015. This favourable operator, its core business is the progressing well with 109 stations momentum will continue to construction and operation of now spread across different benefit the Group’s city-gas and long-haul natural gas pipelines provinces to date. Apart from natural gas businesses. in Anhui province, alongside a this, the Group is also proactively In addition, with gradual downstream distribution business. developing refilling projects for commissioning of large-scale Listing will help speed up the marine vessels and is currently national natural gas projects, company’s construction of natural investing in a joint venture including transmission pipelines gas pipelines and its development project, with six refilling sites, from Sichuan province to eastern of markets in the province. for barges along the Yangtze and southern China and the River in Jiangsu province. This is Construction of the Group’s West-to-East pipeline, and the country’s first, and largest natural gas storage facility in projects for importing piped project in terms of number of underground salt caverns in Jintan natural gas from Central Asia refilling sites, along this river. district, Changzhou city, Jiangsu
10 In September 2013, the joint constructing a plant in Suzhou in 2016, ECO’s aviation fuel facility venture constructed and put into Industrial Park to handle 500 tonnes provided a safe and reliable fuel service the country’s first floating of food waste, green waste supply to Hong Kong International LNG refilling station barge. and landfill leachate daily for Airport and contributed to ECO’s Classified by the government conversion into natural gas, oil steady profit growth. ECO’s LPG as a pilot project, this venture products, solid fuel and fertilizers, vehicular refilling station business represents the start of a new era under the “Hua Yan Water” had a steady operation and for the mainland’s marine industry brand; commissioning is expected satisfactory profit in 2016, in LNG applications. Given that in the third quarter of 2018 and providing a quality and reliable LNG is a form of clean energy will be the Group’s first project fuel supply to the territory’s taxi that is being actively promoted converting waste into high-value and minibus sectors. ECO’s by the Chinese government, products. landfill gas project in the North vehicular and marine refilling East New Territories, after Operation and management station businesses have good operating for several years, of businesses encompassing prospects for the Group. has been generating noticeable city-gas, midstream natural gas, environmental benefits. ECO’s The Group has entered into the city-water and waste processing development of a South East New mainland water market under the and utilisation projects create Territories landfill gas utilisation brand name “Hua Yan Water” greater synergy and mutual project is also progressing for over 11 years and currently advantages. Furthermore, these smoothly, with commissioning invests in, and operates, six water businesses generate a stable expected to start in the first half projects. These include water income and provide good of 2017. This will then further supply joint venture projects in environmental benefits, with increase the proportion of landfill Wujiang district, Suzhou city, room for expansion. The Group gas used by the Group and make Jiangsu province and in Wuhu will therefore keep on looking an additional contribution to city, Anhui province; wholly- for opportunities to invest in energy conservation and emission owned water supply projects in high-quality utility projects on reduction in Hong Kong. Zhengpugang Xin Qu, Maanshan the mainland. city and in Jiangbei Xin Qu, Wuhu With international oil prices city, both in Anhui province; and Emerging creeping low during most of 2016, an integrated water supply and Environmentally-Friendly annual output of ECO’s oilfield wastewater treatment joint Energy Businesses project in Thailand fell to venture project, together with an 1.37 million barrels, causing integrated wastewater treatment ECO’s major businesses in Hong a significant impact on profit. joint venture project for a special Kong – an aviation fuel facility, However, a rebound in industry, both in Suzhou Industrial dedicated liquefied petroleum international oil prices to a range Park, Suzhou city, Jiangsu gas (“LPG”) vehicular refilling of approximately USD55 per province. In addition, given food stations and landfill gas utilisation barrel in late 2016 helps to waste processing and utilisation projects – all operated smoothly stabilise the business conditions is also a sizable environmentally- in 2016. With a total turnover of faced by the project. friendly industry, the Group is approximately 6.2 million tonnes
The Hong Kong and China Gas Company Limited Annual Report 2016 11 chairman’s statement
As smog and air pollution on Xuzhou city, Jiangsu province to Additionally, ECO has launched a the mainland are now a growing produce LNG by methanation of new project to convert 40 per cent concern, the Chinese government coke oven gas has been largely of the coal-based syngas into is stepping up its efforts to completed; trial production is 120,000 tonnes of higher-valued promote the use of LNG to expected to commence in the ethylene glycol, with trial gradually replace diesel as fuel first half of 2017. production targeted to start for heavy-duty trucks. ECO’s before the end of 2017. These will Mainland China, a sizeable networks of natural gas refilling lay a solid foundation for ECO agricultural country, generates stations are gradually taking to further broaden its businesses a large quantity of agricultural shape in provinces and on syngas utilisation and waste every year. Apart from autonomous regions including methanol upgrading. using a small portion of this in Shaanxi, Inner Mongolia, Ningxia, fields or for power generation, In line with its evolving business Shandong, Shanxi, Jiangsu, there are currently no effective development strategy, ECO Henan and Liaoning. All in all, measures to make good use of continues to strengthen its ECO currently has 62 refilling the rest of this waste. However, capabilities in research and stations in operation, under ECO’s research and development technological development, construction or at the planning team has successfully developed from the original technological stage. As expansion of its a world leading approach emphasis on fuel substitutes, now networks progresses, the ECO on pyrolysis and hydrolysis extending to encompass higher brand name will gradually become technologies, which can convert value-added chemical and new more well-known in the market. agricultural and forestry waste material substitutes. These Conversion of biomass into clean into high-value syngas and green include the conversion of high- energy and chemical products block chemicals, such as furfural temperature coal tar oil into is an important part of ECO’s and levulinic acid. To this end, pitch-based carbon materials, business strategy which is in line ECO has launched a pilot project low temperature carbonisation with the policy direction of in Hebei province with trial of oil-rich powder coal, and mainland China. To this end, production expected to start in deep-processing of levulinic acid the plant now under construction the second half of 2017, the to green fuel additives. A number and located in Zhangjiagang city, success of which would pave the of breakthroughs have already Jiangsu province can upgrade foundation for subsequent been achieved, and upon approximately 220,000 tonnes of commercial implementation. commercial application of palm acid oil, a low-quality technologies which can be ECO’s coal chemical project in inedible bio-oil, into high-value proceeded shortly, significant Ordos city, Inner Mongolia oleic acids and other chemical economic and environmental Autonomous Region, operated products each year. Construction benefits could be derived. All smoothly during 2016 yielding is expected to be completed and these successes will create a over 310,000 tonnes of methanol. ready for trial production by the significant competitive edge for Works to upgrade and optimise third quarter of 2017. In addition, ECO’s future development. the facility to convert methanol construction of a project in into natural gasoline are progressing as planned.
12 Towngas China corporate governance and term notes issued had reached Company Limited financial performance continue HK$11.9 billion with tenors (Stock Code: 1083.HK) to contribute to the Group’s ranging from 10 to 40 years, business growth momentum with an average fixed interest Towngas China, a subsidiary of and establishment of a good rate of 3.6 per cent and an the Group, recorded good growth corporate image. average tenor of 15.5 years. in profit after taxation attributable to its shareholders, amounting to During 2016, Moody’s Investors Employees and HK$974 million in 2016, an increase Service maintained its issuer Productivity of approximately 21 per cent over credit rating on Towngas China 2015. As at the end of 2016, the as “Baa1” with a “stable” outlook. As at the end of 2016, the number Group held approximately 1,739 Standard & Poor’s Ratings of employees engaged in the million shares in Towngas China, Services also upheld their “BBB+” town gas business in Hong Kong representing approximately long-term corporate credit rating was 2,019 (2015 year end: 1,999), 64.12 per cent of Towngas China’s and “cnA+” long-term Greater the number of customers was total issued shares. China regional scale credit rating 1,859,414, and each employee on Towngas China with a “stable” served the equivalent of 921 Towngas China added two new outlook. These two international customers, a similar level to 2015. distributed energy projects to its rating agencies’ ratings Inclusive of employees engaged portfolio in 2016, one based in demonstrate recognition of in local businesses such as Sichuan province, and the other Towngas China’s stable financial telecommunications, LPG known as Towngas China Energy status and reflect the company’s vehicular refilling stations and Investment (Shenzhen) Limited. increasing credit strength. engineering contractual works, Towngas China was honoured the total number of the Group’s with the Grand Award presented Financing Programmes employees engaged in businesses by The Hong Kong Management in Hong Kong was 2,392 as at the In order to tap funding in a timely Association (“HKMA”) at its 2016 end of 2016 compared to 2,380 and flexible manner, the Group HKMA Quality Awards, in as at the end of 2015. Related established a medium term note recognition of the company’s manpower costs amounted to programme in 2009 under HKCG long-time commitment to quality. HK$1,052 million for 2016. In 2016, (Finance) Limited, a wholly-owned The award is highly gratifying as there was an approximately subsidiary of the Group. Taking it affirms Towngas China’s 4 per cent average increase in advantage of low interest rates, positive approach to total quality remuneration over 2015. The medium term notes totalling management, enhancement of Group will continue to offer HK$1,328 million, with maturity performance across all its employees rewarding careers ranging from 10 to 12 years, were operations, and quality products based on their capabilities and issued during 2016. In line with and services. Towngas China’s performance and arrange a variety the Group’s long-term business ongoing efforts to improve its of training programmes in order investments, as at 31st December customer services, safety, human to constantly enhance the quality 2016, the amount of medium resources, social responsibility, of the Group’s customer services.
The Hong Kong and China Gas Company Limited Annual Report 2016 13 chairman’s statement
Exclusive of businesses in Hong Barring unforeseen circumstances, this year. Moreover, increasing Kong, the total number of the the forecast dividends per share local manpower costs and Group’s employees in mainland for 2017 after bonus share issue operating expenses are leading China and other places outside shall not be less than the interim to rising costs for businesses in Hong Kong was 47,000 as at and final dividends for 2016. Hong Kong generally. The the end of 2016, an increase of business environment is full of approximately 1,400 compared Business Outlook for 2017 challenges. The Company will, to 2015. however, continue to enhance The Company predicts steady operational efficiency so as to On behalf of the Board of growth in its number of customers maintain stable development of Directors, I would like to thank in Hong Kong during 2017. With its gas business in the territory. all our employees for their a small upturn in the total number dedication and hard work in of inbound tourists in early 2017, Development of export creating value for shareholders the retail market has now manufacturing industries in and customers. improved slightly. The Group’s mainland China is being gas business in Hong Kong is also negatively affected by Bonus Issue of Shares benefiting from the efforts of The uncertainties in both the Government of the Hong Kong global economy and the policy The Directors propose to make a Special Administrative Region to direction of a number of major bonus issue of one new share for increase land and housing supply economies. This, combined with every ten existing shares held by which should help maintain stable other factors including the shareholders whose names are and good growth in the number mainland’s slow economic growth on the Register of Members of the of gas customers in the next few momentum, is adversely Company as at 15th June 2017. years. Additionally, town gas impacting industrial gas demand. The necessary resolution will competitiveness as an energy Thus, growth in gas sales of the be proposed at the forthcoming resource combining both Group’s mainland city-gas Annual General Meeting environmental and economic businesses is weakening. Coupled on 7th June 2017, and if passed, advantages is helping to develop with the exchange rate risk arising share certificates will be posted the commercial and industrial from renminbi devaluation, on 23rd June 2017. energy market. Due to the impact overall profit growth of the of international oil prices, gas Group’s mainland businesses Final Dividend tariff fuel cost adjustment faces challenges in the near term. Nevertheless, in the long term, The Directors are pleased to charges have been reduced the Chinese government’s move recommend a final dividend of which is beneficial to customers to improve smoggy atmospheric HK23 cents per share payable to and further enhances the conditions, thus tightening shareholders whose names are competitiveness of town gas, supervision and administration of on the Register of Members of the relative to electricity in particular, related measures and enhancing Company as at 15th June 2017. in the energy market. However, efforts to reduce carbon Including the interim dividend uncertainties in international emissions and encouraging the of HK12 cents per share paid on politics and the world economy use of clean energy, is creating 3rd October 2016, the total have created variables in Hong opportunities for natural gas to dividend payout for the whole Kong’s economic development year shall be HK35 cents per share.
14 replace use of coal in industrial and slow down the pace of mainland China is increasing, the processing, as well as in boilers, investment of the Group’s Group, with its sizeable customer power generation, distributed emerging environmentally-friendly base, foresees better benefits energy, household heating, gas energy businesses in the short from its expanding new businesses. hot water heaters and clothes term. ECO is moving towards Despite the challenges resulting dryers. Natural gas price production of high-quality from the slowdown in economic adjustments in late 2015 lowered chemical products which are less growth on the mainland, upstream gas prices, thus enhancing sensitive to international oil the Group has formulated, and is competitiveness. Furthermore, prices, taking this as a guide for gradually implementing, plans increasing upstream gas supply, future project investments. in accordance with the country’s expanding pipeline networks and As self-developed research and energy and environmental rapid urbanisation leading to a developments gradually achieve policies. Overall, with demand for continuous rise in demand for results which will be put into natural gas and environmentally- utility facilities and energy, are commercial production, emerging friendly and renewable energy all favourable to the development environmentally-friendly energy increasing alongside society’s of the downstream gas market businesses will ignite a new light growing aspiration for more and the healthy and long-term for the Group, illuminating the environmental protection, coupled development of the natural gas way for long-term development with the Group’s drive to promote business sector in general. and business growth strategy. an innovative mindset to In respect of emerging With the Group’s solid foundation continually add new momentum environmentally-friendly energy in Hong Kong and its diverse to its business growth, the Group businesses, following the Chinese business sectors spread across anticipates development in the government’s move towards extensive areas on the mainland, years to come will be ever greater energy diversification, together with its successful broader and better. environmental protection and technical experience and corporate recycling of materials, the Group brand names and sales channels is continuing to develop and built there over 22 years, alongside apply new technologies for society’s growing concern over air conserving energy and reducing quality, it is anticipated that there LEE Shau Kee pollutant emissions. There is will be ever-rising demand for Chairman also a growing trend for greater clean energy. According to the Hong Kong, 16th March 2017 use of low-sulfur, high-quality oil, Thirteenth Five-Year Plan, electricity and natural gas as fuels the share of natural gas in the for vehicles and vessels to reduce country’s total energy mix is set atmospheric pollution. Though to increase from below 6 per cent international oil prices have currently to 10 per cent by year recently rebounded from their 2020, thus creating huge market lowest point in early 2016, it is potential for clean energy necessary to closely monitor businesses. In addition, given potential market volatility, as that the number of piped-gas this will still impact profit growth customers in Hong Kong and
The Hong Kong and China Gas Company Limited Annual Report 2016 15