BGBS (Beijing Gas Blue Sky Holdings Limited) recently acquired two small-scale LNG distributors in the Yangtze River Delta region, and the financial information they released offers some interesting insights into the profitability of the small-scale LNG business in China.
The first LNG supplier included in the purchase was Zhejiang Bo Xin Energy Company, whose 68 industrial customers received 104,132 tonnes of LNG from Zhejiang Bo Xin in 2018. The second LNG supplier BGBS acquired was Guangdong Xin Te Energy Company, which delivered 14,653 tonnes of LNG to its 23 industrial customers in 2018. Furthermore, Zhejiang Bo Xin and Xin Te recorded net after tax profits of RMB 5,583,000 and RMB 823,000, respectively, in FY 2018. Based on these results, we can estimate these two suppliers’ after-tax margins on a $/mmbtu basis as follows:
For Zhejiang Bo Xin Energy Company,
Profit = (RMB 5,583,000 x 0.15 USD/RMB)/(104,132 tonnes x 52 mmbtu/tonne) = $0.155/mmbtu
For Guangdong Xin Te Energy,
Profit = (RMB 823,000 x 0.15 USD/RMB) / (14,653 tonnes x 52 mmbtu/tonne) = $0.162/mmbtu
At first glance, these margins ($0.155/mmbtu for Zhejiang Bo Xin, and $0.162 for Xin Te) may seem rather modest in comparison with those targeted by some other LNG trading strategies. This is especially true when we compare these to the estimated average selling prices for the volumes referenced above. Zhejiang Bo Xin had turnover of RMB 363.7 million in FY 2018, and Xin Te’s turnover was RMB 64.2 million. On a $/mmbtu basis, we calculate average sales prices as follows:
For Zhejiang Bo Xin Energy Company,
LNG Sales Price = (RMB 363.7 million x 0.15 $/RMB) / (104,132 tonnes x 52 mmbtu/tonne)
= $10.08/mmbtu
For Guangdong Xin Te Energy,
LNG Sales Price = (RMB 64.2 million x 0.15 $/RMB) / (14,653 tonnes x 52 mmbtu/tonne)
= $12.64/mmbtu
These are very approximate estimates since we are assuming that virtually all of these firms’ turnover was derived from the LNG sales volumes cited above. Nevertheless, these estimates are in line with prices we have seen for similar deals over the same timeframe. Based on these figures, these two small-scale suppliers realized margins of only about 1.3% to 1.5% on their sales.
For those who are underwhelmed, we must remind that these are not only on an after-tax basis, but also after both direct and indirect expenses (e.g., overhead) beyond the cost of supply. Furthermore, these margins have a relatively low risk profile, since small-scale LNG suppliers will often sell at a fixed price that reflects the cost of their entire supply chain through delivery at the customer location, with embedded protection (i.e., pass-thru provisions) should their cost of supply exceed expected levels. Finally, we will mention that these levels are also largely in line with levels we have seen for other, more “mature” energy commodity supply sectors (e.g., petroleum products).
So what can we conclude from these observations? Our main takeaway is that small-scale LNG in China has matured to the point where customers have sufficient choices such that competition has brought margins to reasonable levels. By the same token, suppliers are sophisticated enough to manage their supply chain costs and performance risk such that these margins represent sufficient expected return for investment. BGBS appears to concur, given its decision to purchase controlling interests in these two firms (100% of Zhejiang Bo Xin’s equity and 51% of Xin Te’s equity) for a combined price tag of RMB 205 million.