OREANDA-NEWS. Fitch Ratings says today that China's city gas operators will continue to see healthy customer connection growth despite the slowdown in China's overall gas demand amid a slowing economy.

Fitch expects one-off connection fees to continue to account for at least 30% of operators' total EBITDA over the next five years, even though EBITDA from more-stable gas sales now exceeds EBITDA contribution from one-off connection fees for most leading city gas operators, such as ENN Energy Holdings Limited (ENN, BBB/Stable) and China Resources Gas Group Limited's (CRG, BBB+/Stable).

China's still-low city gas penetration (around 40%) and the regulatory push for cleaner energy - should support connection growth even though the economic advantages of gas have been reduced with the fall in oil and coal prices. We see good prospects for CRG and ENN, notwithstanding the higher penetration in their existing footprints than the nation's average.

We observe city gas operators actively promoting residential connections, but adopting somewhat different strategies. For example, ENN has somewhat increased its focus in connecting older apartment buildings near its existing pipelines. The company estimates these connections cost about CNY200 more than connections at newly built apartments. The higher costs contributed to a slight decline in the connection business' EBITDA margin, but it still remained healthy at around 63% in 1H15, down from 65% for the same period last year.

CRG has been chasing connection opportunities where available within its coverage areas. CRG reported its average residential connection fee in 1H15 fell 14% to CNY2,580 from CNY3,004 a year earlier. The company's management said the decline was due to more connections made in regions with lower fees. In some areas, connection fees can be as low as CNY1,200 per residential connection. CRG expects the wide geographic coverage and wide range of connection fees to result in volatility in the average residential connection fee over different reporting periods. CRG's average residential connection fee ranged between CNY2,500 and CNY3,500 with gross margin of 55% to 65% in the past due to differences in the mix of cities. However, segmental margin was not negatively affected; it was 48% in 1H15 compared with 45% for the same period last year, as economies of scale from the larger number of connections and the lower cost of connections in certain areas were able to offset the pressure on margins from lower connection fees in other areas.