Chart Industries (NASDAQ:GTLS) has been a great outperformer YTD, driven primarily by the development of LNG transportation sector in China. The company announced two orders from PetroChina totaling over $90mn this year. With regard to their business in China, during 2Q call, the company expected "50% to 100% growth per year over the medium term", and hence planned to double capacity there. These all sound great, however, I believe that the market, and even the management, failed to see the potential impact of recent natural gas price hike.
Background: on July 2nd, Chinese government announced natural gas reform and effectively raised non-residential gas prices by a meaningful amount. Later, PetroChina announced to raise the gas prices supplied to LNG plants in several provinces by 27% on average. Based on my back-of-envelop calculation, the payback period for a new LNG truck will lengthen from below 9 months currently to 12-24 months, depending on the magnitude of price pass-through at LNG refueling station.
I understand that even after this round of price hike, LNG is still cheaper than diesel, and LNG truck still makes economic sense. However, some marginal users probably will think twice now before adopting. Some Chinese press has also reported that LNG truck manufacturers have seen order cancelation and expected to see growth rate to drop. Along the value chain, margins of LNG plants and refueling stations will be squeezed, too.
Bulls on GTLS may still not be convinced, as I am sure the company management is still very positive. However, let's see how the local stock markets reacted on Chart's China peers. Zhangjiagang Furui Special Equipment (300228), listed on Shenzhen Growth Enterprises Market (NYSEARCA:GEM), China's Nasdaq, has dropped by about 25% since the announcement, compared to GEM Index up 15% and the positive 11% performance of Shanghai Composite, the more well-known index. Another GTLS's competitor, CIMC Enric (3899.HongKong), has dropped by 30%, compared to Hong Kong China Enterprises Index's 15% rally. In my humble opinion, the local markets have no doubt about the continued development of LNG transportation sector, as these two stocks are still trading at a healthy valuation. However, I think everyone would agree that the P/E multiply on a company with 100% growth will be significantly different than that with only 50% growth. In another word, the drop of growth rate should de-rate the stock.
There is another small thing to keep an eye on. China's recent anti-corruption investigation has caused huge earthquake in PetroChina's management. Most local companies that have business relationship with PetroChina are more or less impacted. One of the main concerns by the stock market is about the new orders from PetroChina in the near future. Maybe we won't see new sizable orders any time soon?