OREANDA-NEWS. December 12, 2013. China Gas, the mainland's largest city gas distributor, is in talks to buy a 2 billion yuan (HKD2.54 billion) portfolio from its biggest shareholder, Beijing Enterprises Group, according to sources with the companies.

At stake are about 20 city gas projects operated by the state-owned group in provinces such as Shandong, Hebei and Xinjiang.

The potential asset injection, if it materialises, means a significant step forward in Beijing Enterprises' ambition to break out from its principal market - Beijing - to the rest of the country.

The sources said it was also part of the group's asset reorganisation, which aimed to bundle its non-Beijing city gas portfolio with that of China Gas while leaving Beijing Gas - a wholly owned subsidiary of its Hong Kong-listed infrastructure flagship, Beijing Enterprises Holdings - to focus on the capital, where it is the sole gas supplier.

Earlier this month, the group transferred its 21.96 per cent stake in China Gas to BEH for HKD 7.39 billion.

BEH vice-chairman Zhou Si, also chairman of the board and executive director of China Gas, said on Tuesday the two companies were discussing "co-operation" but declined to comment further.

This is despite the fact that China Gas had announced a "strategic co-operation framework agreement" with the group and BEH to jointly develop "gas-related value-added services", such as projects that turn coal into natural gas, and bid for new gas distribution projects.

"The China Gas management is looking into the valuation of Beijing Enterprises Group's portfolio, which is fairly sizeable," one source said. "This makes business sense."

The group amassed its stake in China Gas by buying shares in the market since February last year, jumping into a multilateral battle for the control of the gas provider.

China Gas was the subject of a hostile takeover bid by a consortium of smaller rival ENN Energy and Sinopec, the mainland's No2 oil firm, as well as British-based Fortune Oil.

Analysts said the potential asset injection would boost China Gas' portfolio of 208 city projects, which ranged from Heilongjiang in the north to Guangdong in the south.

Brokerages such as China International Capital Corp, Citi, Jefferies and JPMorgan upgraded on Wednesday their forecasts for China Gas' earnings for the financial years to March 2014 and 2015 by 7 to 25 per cent after the company reported unexpectedly strong interim results on Tuesday.

Goldman Sachs said the 94 per cent jump in China Gas' core net profit to HKD 1.27 billion in the six months to September was driven by strong gas sales and stringent control of financing costs.

The brokerage forecast full-year net profit would increase 42 per cent from a year earlier to HKD 2.5 billion.