Entering text into the input field will update the search result below

The Hong Kong And China Gas Company: Value Creating But Not Value Maximizing For Shareholders

Natalie Koo profile picture
Natalie Koo


  • HOKCY's large valuation premium over peers is due to its monopolistic position and its unregulated tariff setting ability in its core Hong Kong market.
  • However, since 2008, management made a major strategic change in corporate direction and decided to expand into China in pursuit of growth.
  • On one hand, this represented a diversion of cash flows that could have been distributed to shareholders in the form of large dividends.
  • On the other hand, HOKCY's PRC operations' low ROA and ROIC belie its value creation. HOKCY enjoys low cost of capital. Companies should invest as long as ROIC exceeds WACC.
  • Value creation is not value maximization. Investors could likely have redeployed dividends from HOKCY to earn returns above mid-single digits (which is the return of HOKCY's PRC business).

Hong Kong and China Gas ("HKCG") (OTCPK:HOKCY) rose to become the monopoly gas supplier in Hong Kong as a result of government regulatory decisions in the 80s and 90s. The policies at the time discouraged the use of bottled LPG in households and banned transmission of LPG under public roads on one hand, and encouraged the upgrading of substandard water heaters and the use of piped gas on the other hand, which effectively led to the creation of Hong Kong and China Gas as a monopoly (Source: "Safety Regulation and the Rise of Towngas in Hong Kong" by Centre for Asian Business Cases, The University of Hong Kong). Meanwhile, since HKCG does not officially have a franchise or exclusive rights to supply gas in the territory, it operated in an “open market environment” in that sense. Specifically, the government did not regulate Towngas in price or profit and does not do so even today. Under an agreement in 1997, the company only needs to give notice three months in advance about any tariff adjustment and justifications, and brief Legco and the Environment Bureau’s Energy Advisory Committee.

Being a monopolistic utility business whose tariff is not regulated and not linked to capex is so valuable in terms of competitive advantage, it explains why HKCG trades at such a huge premium to other utility peers. Since 2008, however, management decided to expand into China in pursuit of growth. This was a major strategic change in corporate direction. And as with all major strategic endeavors and/or expansions into new markets, there is always a risk of de-rating or re-rating*. In HKCG’s case, the stock has re-rated handsomely from 10-20x forward P/E before 2008 to 20-30x post 2008.

*Initiatives that don’t get far enough to contribute meaningfully to revenue/profits get ignored by the market

This article was written by

Natalie Koo profile picture
Currently a valuation professional in an economic and financial consulting firm. Previously an analyst at a Hong Kong based long short equity fund with fundamental driven investment approach and emerging market focus.  Always happy to connect and exchange ideas.  Please feel free to reach out to me at nat.koo@gmail.com

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.