(incorporated in the Cayman Islands with limited liability) (Stock Code: 1083) Annual Report 2013 Expanding New Horizons Mission To provide our customers with a safe, reliable supply of gas and the caring, competent and efficient service they expect, while working to preserve, protect and improve our environment. Contents 2 Corporate Information 3 Geographical Coverage 4 Five-Year Financial Summary 5 Financial Highlights 6 Chairman’s Statement 10 Corporate Governance Award 12 Awards 14 Financial Review 18 Business Review 30 Biographical Details of Directors 34 Report of the Directors 49 Corporate Governance Report 61 Independent Auditor’s Report 63 Consolidated Income Statement 64 Consolidated Statement of Comprehensive Income 65 Consolidated Statement of Financial Position 67 Consolidated Statement of Changes in Equity 68 Consolidated Statement of Cash Flows 70 Notes to the Consolidated Financial Statements Corporate Information Board of Directors Registered Office Executive Directors P.O. Box 309 Chan Wing Kin, Alfred (Chairman) Ugland House Wong Wai Yee, Peter (Chief Executive Officer) Grand Cayman Ho Hon Ming, John (Company Secretary) KY1-1104 Cayman Islands Non-Executive Director Kwan Yuk Choi, James Head Office and Principal Place of Business 23rd Floor, 363 Java Road Independent Non-Executive Directors North Point, Hong Kong Cheng Mo Chi, Moses Telephone : (852) 2963 3298 Li Man Bun, Brian David Facsimile : (852) 2561 6618 Chow Vee Tsung, Oscar Stock Code : 1083 Website : www.towngaschina.com Authorised Representatives Chan Wing Kin, Alfred Principal Share Registrar and Ho Hon Ming, John Transfer Office Royal Bank of Canada Trust Company (Cayman) Limited Company Secretary 4th Floor, Royal Bank House Ho Hon Ming, John 24 Shedden Road, George Town Grand Cayman KY1-1110 Audit Committee Cayman Islands Li Man Bun, Brian David (Chairman) Hong Kong Branch Share Registrar Cheng Mo Chi, Moses Chow Vee Tsung, Oscar Computershare Hong Kong Investor Services Limited 17M Floor Remuneration Committee Hopewell Centre 183 Queen’s Road East Cheng Mo Chi, Moses (Chairman) Wanchai Li Man Bun, Brian David Hong Kong Chow Vee Tsung, Oscar Chan Wing Kin, Alfred Hong Kong Branch Share Transfer Office Nomination Committee Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor Chan Wing Kin, Alfred (Chairman) Hopewell Centre Cheng Mo Chi, Moses 183 Queen’s Road East Li Man Bun, Brian David Wanchai Chow Vee Tsung, Oscar Hong Kong Auditor Principal Bankers Deloitte Touche Tohmatsu Bank of China (Hong Kong) Limited Certified Public Accountants China Merchants Bank, Shenzhen Branch 35/F, One Pacific Place 88 Queensway Hong Kong 2 Towngas China Company Limited Annual Report 2013 Geographical Coverage Heilongjiang JJilin Liaoning Inner Mongolia Hebei Shandong JiJiangsu Anhui ZZhejianghejia Sichuan ChChongqingongqi Hunan Jiangxi Fujian Guizhou Guangdongg Guangxi No. of Projects: 93 Heilongjiang Qiqihar, Qiqihar (vehicle gas refilling station) Jilin Changchun, Gongzhuling, Siping Liaoning Anshan, Beipiao, Benxi, Chaoyang, Changxingdao, Dalian Economic and Technical Development Zone, Fuxin, Jianping, Kazuo, Lvshun, Shenyang, Tieling, Wafangdian, Wafangdian (midstream), Xinqiu, Yingkou Shandong Boxing, Chiping, Feicheng, Jimo, Jinan West, Laiyang, Laoshan, Linqu, Longkou, Pingyin, Taian, Weifang, Weihai, Zhaoyuan, Zibo, Zibo Lubo Jiangsu Dafeng, Nanjing Gaochun Anhui Anqing, Bowang, Bozhou, Chizhou, Huangshan, Huizhou, Maanshan, Tunxi, Wuhu, Zhengpugang Jiangxi Changjiu, Fuzhou, Jiujiang, Wuning, Xiushui, Yifeng Sichuan Cangxi, Chengdu, Dayi, Jianyang, Leshan, Lezhi, Mianyang, Mianzhu, Pengshan, Pengxi, Pingchang, Weiyuan, Xindu, Xinjin, Yuechi, Zhongjiang, Ziyang Chongqing Qijiang Guangdong Fengxi, Foshan, Qingyuan, Shaoguan, Yangdong Guangxi Guilin, Zhongwei (Fusui) Zhejiang Huzhou, Lishui, Tongxiang, Yuhang Hunan Miluo Fujian Changting Hebei Cangxian, Mengcun, Qinhuangdao, Shijiazhuang, Yanshan Guizhou Xingyi Inner Mongolia Baotou Towngas China Company Limited Annual Report 2013 3 Five-Year Financial Summary For the year ended 31 December 2009 2010 2011 2012 2013 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 RESULTS Turnover 2,905,953 2,981,420 4,321,344 5,183,466 6,715,709 Profit before taxation 414,214 626,248 1,033,536 1,235,548 1,608,852 Taxation (102,071) (136,442) (256,943) (299,393) (382,509) Profit for the year 312,143 489,806 776,593 936,155 1,226,343 Profit for the year attributable to: Shareholders of the Company* 265,090 435,797 708,754 840,798 1,106,286 Non-controlling interests 47,053 54,009 67,839 95,357 120,057 Profit for the year 312,143 489,806 776,593 936,155 1,226,343 HK cents HK cents HK cents HK cents HK cents Earnings per share Basic 13.54 19.93 28.84 34.17 42.46 Diluted 13.52 19.93 28.82 34.10 42.34 As at 31 December 2009 2010 2011 2012 2013 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 ASSETS AND LIABILITIES Total assets 11,330,417 14,882,799 18,183,406 21,255,284 25,628,676 Total liabilities (4,442,294) (5,747,672) (7,884,151) (9,968,323) (12,150,413) 6,888,123 9,135,127 10,299,255 11,286,961 13,478,263 Equity attributable to shareholders of the Company 6,433,588 8,563,437 9,615,314 10,481,716 12,531,303 Non-controlling interests 454,535 571,690 683,941 805,245 946,960 Total equity 6,888,123 9,135,127 10,299,255 11,286,961 13,478,263 * the Company: Towngas China Company Limited 4 Towngas China Company Limited Annual Report 2013 Financial Highlights Turnover Number of Customers Profit Attributable (All Entities) to Shareholders of the Company (HK$ Millions) (Millions) (HK$ Millions) 6,716 8.5 1,106 5,183 7.6 841 4,321 6.7 6.0 5.3 709 2,981 2,906 436 265 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Turnover Analysis Percentage of Gas Volume by Customer Mix (All Entities) 22% 24% 2013 59% 2013 78% 17% 23% 25% 2012 58% 2012 77% 17% Gas connection Piped gas & related products Residential Commercial Industrial Towngas China Company Limited Annual Report 2013 5 Chairman’s Statement 6 Business Performance in 2013 2013 generally saw stabilising global economy with occasional volatility, while China’s economic performance fared better than the rest of the world. A 7.7% year-on-year growth was reported in the Gross Domestic Product of the nation in 2013. Thanks to the committed efforts of all our employees in the Towngas China Group, the Group reported favourable results for 2013. The Group’s turnover jumped 30% over 2012 to HK$6,716 million, while profit after taxation attributable to shareholders of the Company amounted to HK$1,106 million, a significant increase of 32% as compared to 2012. Development of the City Gas Industry China is facing serious air pollution problem currently. Persistent smog with extensive geographical coverage has become a grave concern across the nation. In January 2013, the Chinese Government announced its target to limit the country’s total energy consumption in 2015 to 4 billion tonnes of standard coal or less, representing growth in consumption at a mere 25% over 2010. This rather aggressive goal in energy conservation and emissions reduction drives the more active use of natural gas across the country and accelerates the conversion from the use of coal-fired to natural gas energy by the local governments. Coupled with the rapid growth of the country’s urban population, China’s city gas industry is expected to keep thriving in the long term. Overview of the Natural Gas Supply In accordance with the “12th Five-Year Plan” (2011-2015), China announced direction for reforms in independent operation of natural gas pipeline networks and opening up of such networks to private operators in a fair manner. The National Energy Administration also solicited the views of natural gas operators with regard to the regulation of mid-stream natural gas pipeline transmission rates and the equitable opening up of oil and gas pipeline and network facilities, indicating the imminent reforms for mid-stream natural gas operations. These developments will help to drive the growth of Mainland China’s natural gas market as it will accelerate geographic coverage of natural gas supplies while also enhancing the overall economic and cost efficiencies of the natural gas industry chain. Towngas China Company Limited Annual Report 2013 7 Chairman’s Statement In July 2013, the National Development and Reform Commission (“NDRC”) raised the natural gas city-gate prices for provincial non-residential consumption, while stating for the record that natural gas city-gate prices will continue to be adjusted in the future. The NDRC also stipulated that natural gas sales prices below the provincial level will be determined by the provincial pricing control authorities which will take local conditions into account. Being driven by the market, China increased natural gas selling prices. This will attract more natural gas imports into China, alleviating the nation’s undersupply of natural gas. The China-Myanmar natural gas pipeline was commissioned recently in 2013, while natural gas supplies from Russia are expected to materialise in 2017 at the earliest, following the breakthrough in China-Russian pricing negotiations for the supply of natural gas. In addition, the commencement of operation of various coastal liquefied natural gas receiving terminals will contribute towards the ongoing and stable development of China’s natural gas industry and city gas sectors. The move to increase city-gate prices for non-residential natural gas consumption in July 2013 has had a minimal impact on the Group’s results for 2013, as the Group was able to pass the price hike onto industrial and commercial customers. Business Development Strategy The rapid development of the natural gas industry features prominently in China’s “12th Five-Year Plan”. Apart from expanding natural gas exploration and importation, the country has also made significant investments in the construction of major natural gas facilities.