Hong Kong and China Gas Company Ltd.

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Hong Kong and China Gas Company Ltd.

23/F 363 Java Road, N Point
Hong Kong
Telephone: +852 2963 3388
Fax: +852 2561 6182
Web site: http://www.towngas.com

Public Company
Incorporated: 1862
Employees: 1,954
Sales: HKD 8.15 billion
Stock Exchanges: Hong Kong OTC
Ticker Symbol: HOKCY (ADR)
NAIC: 221210 Natural Gas Distribution

Hong Kong and China Gas Company Ltd. (also known as Towngas) is the oldest public utility operating in Hong Kong. The company is also the sole supplier of piped gas to the Hong Kong region—the company far outdistances its primary LPG competitors. Towngas company has extended beyond Hong Kong itself, however, to claim a growing presence in mainland China. The company serves more than 1.5 million customers through a pipeline network of some 3,000 kilometers. On the Chinese mainland, the company is active in some 30 city gas pipeline projects—including six new projects added in 2004 alone. Most of the company's mainland operations are carried out through a number of joint ventures, including in Guangzhou, Zhongshan, Fangcun, Panyu, Beijing, Wuhan, Anquing, Maanshan, Shunde, and others. Towngas produces its own gas, mostly from two naphtha-based production plants in Hong Kong. Its entry into the mainland market has been aided by majority shareholder Henderson Investment's strong relationship with the Chinese government. Henderson Chairman Lee Shau Kee is also chairman of Towngas. In 2004, the company posted revenues of HKD 8.15 billion.

Beginnings in the 19th Century

Hong Kong and China Gas Company's origins stretch back to the 1860s, making it Hong Kong's—and China's—oldest public utility. Although incorporated in England in 1862, the company focused from the outset on the Hong Kong market, introducing the town's first piped gas in 1864. The company, which became popularly known as Towngas, built a 24-kilometer pipeline network that provided gas for 500 street lamps, as well as to a number of buildings in the British colony.

The company set up its own gas production facilities, using coal as its feedstock. Hong Kong Island remained the company's sole market until the end of the 19th century and through most of the 20th century as well. In the 1930s, Towngas faced a setback when one of its gasholders was destroyed in an explosion. In 1956, however, the company commissioned a new and larger gasholder at Ma Tau Kok. Four years later, the company listed its shares on the Hong Kong Stock Exchange for the first time.

In the mid-1960s, Towngas began seeking an alternative feedstock source for its gas production. The company switched to fuel oil in 1967. By 1973, however, Towngas begun investigating the use of the more environmentally friendly naphtha for its feedstock. Then in 1977, the company converted most of its gas production to naphtha.

By then, Towngas had begun expanding its range of operations, adding the Chung Hom Kom and Stanley districts of Hong Kong Island in 1975. In that year, also, the company began supplying gas to the nearby Kowloon peninsula for the first time, in a joint venture with the Hong Kong Housing Authority. This new market helped the company boost its total customer base to more than 170,000 by 1980.

After 120 years as a British corporation, Towngas transferred its registration to Hong Kong. Part of the motivation behind this move came from the arrival of Hong Kong property development tycoon Lee Shau Kee, through Henderson Land, as Towngas's majority shareholder. In 1983, Lee took over as Towngas chairman.

Lee Shau Kee, whose father had operated a money-changing business in Guangzhou prior to China's Communist revolution, was sent to Hong Kong in 1948 with half of the family's assets (the other half was sent to Macau with Lee's brother). By 1958, Lee had entered the real estate market, taking advantage of the boom in the Hong Kong property market. In 1972, Lee had decided to focus on property development, founding Henderson Land Development in 1973, and, in 1975, acquiring Wing Tai, which later became Henderson Investment. Through Henderson Land Development, Lee established himself as one of Hong Kong's top businessmen, building a fortune worth billions of dollars.

Powering Growth in the 1980s

Lee, who remained chairman of Henderson, was to play an important role in Towngas's expansion, not least because of his strong relationship with mainland Chinese authorities, as well as his powerful economic position in Hong Kong. Under Lee, Towngas launched a new period of expansion.

Towngas now became interested in widening its reach to include all of the Hong Kong region, including Kowloon and the New Territories. In support of this, the company began building a new high-pressure pipeline to bring gas to the New Territories. Towngas's connection with Henderson provided the company with a solid foundation for growth; Henderson played a leading role in developing the New Territories, outfitting its residential developments so that they could be connected to Towngas's pipeline. At the same time, the Hong Kong government also chose to outfit its own new housing developments for Towngas's gas. Towngas's penetration in the region's new housing developments reached up to 90 percent during the decade.

By 1983, the company boasted more than 300,000 customers. By 1989, the company had more than doubled that figure, topping 617,000 customers by mid-1989. In order to ensure its gas supply for its rapidly growing network, Towngas launched construction of a new gas production plant at Tai Po Plant in the early 1980s. The company commissioned the first phase of that plant in 1986. That facility rapidly ramped up its production, and by the end of the decade, the Tai Po plant supplied some 86 percent of Towngas's supply requirements.

Towngas continued its rapid growth into the new decade, topping 760,000 customers in 1991. The company increased its production capacity, spending some HKD 1 billion (approximately $120 million) to triple capacity at its main Tai Po gasworks in the early 1990s. The company also extended its gas pipeline to new parts of Hong Kong, reaching Yuen Long in 1991, and Tuen Mun and Tin Shui in 1992.

In 1994, Towngas launched construction of a new pipeline to extend its reach to Lantau Island. That area was expected to experience a strong population with the opening of a new airport serving the Hong Kong market. The company also targeted expansion into the fast-growing Discovery Bay area in the mid-1990s. At the same time, Towngas launched a series of initiatives to encourage customers to abandon a number of electrical appliances in favor of gas-driven appliances. As such, the company teamed up with appliance maker Renal, based in Japan, to develop a gas-powered clothes dryer adapted to the Hong Kong market. The two companies also began designing a new stove incorporating a gas-driven rice cooker. For the restaurant sector, the company helped develop a gas-fired pig roaster capable of roasting from six to ten pigs at a time. These initiatives helped boost the group's customer base past the one million mark by 1994.

Mainland Expansion for the New Century

Yet Towngas began looking forward to new markets by the mid-1990s. Initially, the company investigated expansion opportunities elsewhere in the Southeast Asian region. In 1993, however, the company's interest turned to the underdeveloped Chinese mainland, which led to a first feasibility study that year. This quickly led to a joint venture agreement to establish gas distribution operations in the cities of Panyu and Zhongsan. These projects got underway in 1995. The following year, the company added a new joint venture to enter the city of Zhonshan as well.

Towngas quickly lined up new joint ventures: In 1996, the company signed agreements to enter Guangzhou, Fangcun, Shenzhen, Shantou, Dongguan, and Zhauhai in the Guangdong region. The first of these, Guangzhou and Fangcun, launched operations by the following year. Once again, the company's relationship with Lee Shau Kee helped pave the way for its rapid growth in these new markets.

Company Perspectives:

Mission: To provide our customers with a safe, reliable supply of gas and the caring, competent and efficient service they expect, while working to preserve, protect and improve our environment.

Key Dates:

1862:: Hong Kong and China Gas Company (Towngas) is incorporated in England.
1884:: The first gas pipeline is launched in Hong Kong City.
1960:: Towngas goes public with a listing on the Hong Kong Stock Exchange.
1975:: The company extends its services onto the Kowloon peninsula.
1977:: The company switches to naphtha as its primary feedstock.
1982:: The company transfers its registration to Hong Kong as Henderson Investment becomes the majority shareholder.
1983:: Henderson Chairman Lee Shau Kee becomes Towngas chairman.
1986:: A new gas production plant is constructed at Tai Po.
1995:: The company's first joint venture is launched on the Chinese mainland, in Panyu, Guangdong province.
2001:: The company launches its first joint venture in Jiangsu province.
2005:: The company enters Beijing with its first joint venture.

Towngas's expansion onto the mainland took on greater importance in the early 2000s, as its total customer base topped 1.5 million. While this made the company the largest gas supplier in the Asian region, it also meant that it had reached, for the most part, the limits of its growth in Hong Kong itself, a market that counted only 1.7 million households. Yet the extension of its network onto the mainland was not the company's only effort at future expansion.

In 2000, the company launched a number of diversification efforts, such as the creation of GH-Fusion Ltd., a subsidiary dedicated to the production of polyethylene fittings for the mainland market, launched in 2000. The company also set up ECO Energy Company Ltd., which began constructing LPG filling stations in West Kowloon and Chai Wan. In another direction, Towngas began producing dry ice using the carbon dioxide produced as a byproduct of its gas production process.

Nonetheless, growth on the mainland remained Towngas's primary motor into the 2000s. In 2001, the company formed its first joint venture beyond Guangdong, with a project to begin supplying the Suzhou Industrial Park in Jiangsu province. This was followed shortly after by joint ventures in Yixing, also in Jiangsu, and in Qingdao and Laoshan. By 2002, the company's gas pipeline network topped 3,000 kilometers for the first time.

Towngas's mainland prospects were buoyed with the Chinese government's decision to deregulate the country's pipedgas market. In order to enhance its fast-growing position in the country, Towngas announced its intention to launch investments of more than HKD 1 billion in 2003. The company also stated that it was considering a separate stock market listing for its mainland operations by as early as 2006.

In the meantime, Towngas continued to build out its mainland network, adding six new joint ventures in China in 2004 alone. These included agreements in Anhui province for a gas midstream project, and the creation of a city piped-gas venture in Huzhou. By early 2005, the company had entered the Beijing market as well. Backed by Lee Shau Kee and Henderson Investment, Towngas appeared certain to play a major role in China's gas utility market in the new century.

Principal Subsidiaries

Anquing Hong Kong and China Gas Company Limited (China; 50%); Barnaby Assets Ltd.; Changzhou Hong Kong and China Gas Company Limited (China; 50%); Danetop Services Ltd.; ECO Energy Company Ltd.; Empire Bridge Investments Ltd.; Hong Kong & China Gas (China) Ltd.; Hong Kong & China Gas Investment Ltd.; Maanshan Hong Kong and China Gas Company Limited (China; 50%); Monarch Properties Ltd.; Nanjing Hong Kong and China Gas Company Limited (China; 50%); Pathview Properties Ltd.; Planwise Properties Ltd.; Prominence Properties Ltd.; P-Tech Engineering Company Ltd.; Quality Testing Services Ltd.; Shunde Hong Kong and China Gas Company Limited (China; 50%); Starmax Assets Ltd.; Summit Result Development Ltd.; Superfun Enterprises Ltd.; Suzhou Hong Kong and China Gas Company Limited (China; 50%); Taian Taishan Hong Kong and China Gas Company Limited (China; 50%); Towngas Enterprise Ltd.; Towngas International Company Ltd.; Towngas Investment Company Ltd.; Towngas Technologies Ltd.; Towngas Telecommunications Fixed Network Ltd.; Upwind International Ltd.; U-Tech Engineering Company Ltd.; Uticom Ltd.; Weifang Hong Kong and China Gas Company Limited (China; 50%); Weihai Hong Kong and China Gas Company Limited (China; 50%); Wuhan Natural Gas Company Ltd. (China; 50%); Zibo Hong Kong and China Gas Company Limited (China; 50%).

Principal Competitors

Shenyang Gas Company General; Beijing Coal Gas Co.; XinAo Gas Holdings Ltd.; Hongkong Electric Holdings Limited; Changchun Gas Company Ltd.; Tianjin Tianlian Public Utilities Company Ltd.; Dongguan SHV LPG Company Ltd.; Sinolink Worldwide Holdings Ltd.; Panva Gas Holdings Ltd.; CLP Holdings Limited; CNOOC Limited.