OREANDA-NEWS. Fitch Ratings expects city gas sales growth in China in the next five years to average in the low- to mid-teens, slower than historical rates but faster than the pace that several operators reported for the first six months of 2015 in their recent interim results announcements.

The Chinese city gas operators reported that their gas sales rose at a slower pace in 1H15 than the average growth of the last five years. Binhai Investment Company Limited's (BHI, BBB-/Stable) gas sales volume rose 9% in 1H15, China Oil and Gas Group's increased 8%, China Resources Gas Group Limited's (CRG, BBB+/Stable) climbed 11%, ENN Energy Holdings Limited's (ENN, BBB/Stable) increased 11%, and Towngas China Company Limited rose 3%. We believe such slow growth is likely to extend to the second-half of 2015. Most of these operators' sales rose by about 20% annually on average in 2010-2014.

For those companies that reported the breakdown in gas sales volume to the residential and industrial and commercial (C&I) segments, the residential segment maintained more robust growth of above 10%. However, the C&I segment, which accounted for over 50% of the volume sold, experienced growth in the single digits.

The C&I segment's growth comes from existing customers and new customers. The sales to existing C&I customers are generally driven by economic activity; while many of the new C&I customers are converting to natural gas due to regulations pushing for conversion from coal-powered equipment to gas.

Economically, though, C&I end-users are still better off using coal-powered equipment, even with a likely cut in city-gate level gas prices in the coming months. Therefore, in our view, a moderate reduction in natural gas prices in 2H15 is unlikely to materially boost gas demand growth immediately.

However, China's policies to address pollution issues will continue to drive increased usage of natural gas. China is committed to increase the share of natural gas in its primary energy mix from around 6% in 2014. With the slower economic growth in China, total gas demand by 2020 is not likely to hit the previous estimates. However, China's policy push and the large quantities of committed pipeline gas import volumes the country has secured should support a healthy volume growth for the established city gas operators in the country over the medium term.

At the same time, we do not expect the slower growth in gas demand to materially negatively impact the financial metrics of the larger players, such as CRG and ENN. In addition to their currently strong balance sheets, Fitch expects the EBITDA from recurring gas sales to cover most of their planned capex over the next two to three years.