The Chongqing government proposed to abolish installation fees, which triggered market concerns on a significant cut of connection fees amid tightening policy, resulting in a plunge in gas sector. However, we believe that the share is oversold. In Chongqing, the gas connection fee has two parts, namely an “initial connection fee” and an “installation fee”, which costs 1150 yuan and 1000 yuan per household respectively. Based on the draft policy, the Chongqing government is contemplating cancelling the initial connection fee, while the installation fee will remain unchanged. As there are only a few cities which have this dual-fee charging scheme, other cities are unlikely to follow. Furthermore, the previously published “13th Five Year Plan on Natural Gas Development” targets natural gas to account for 8.3%-10% of total primary energy used by 2020, while charging connection fee is the key incentive for gas distributors to expand their gas network connection. Currently all the cities that implemented a cut of connection fees have a natural gas penetration rate of about or over 70%, whereas the average penetration rate of natural gas in mainland China is only 40%. As a result, we believe the removal of installation fees will not be implemented in other regions. The Chinese government may subsidize gas distributors with alternative fee payment method such as monthly terminal maintenance fee with a view to achieving the natural gas target. Consequently we expect a positive growth on gas sector in long-term.

HK Economic Journal
JP Morgan

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