OREANDA-NEWS. Fitch Ratings says today that China Resources Gas Group Limited's (CRG, BBB+/Stable) 1H15 results show the quality of its cash flow generation continues to improve - with higher profit contribution from natural gas sales and a reduced level of structural subordination.

The increasingly larger contribution from natural gas sales is positive for the CRG's credit profile. Revenues from natural gas sales are more stable compared with one-off connection fees. Profit from the sale and distribution of gas fuel and related products rose 40% yoy to HKD1.5bn in 1H15 and accounted for 54.7% of profits (profit share of connection fees: 45.3%). The other leading operators in the sector have also chalked up larger profit contributions from natural gas sales as the industry matures.

One of the credit weaknesses of CRG had been its higher level of structural subordination compared with similar, large rated city gas operators in China, due to its greater reliance on joint ventures and associate companies for earnings generation. CRG only started owning and operating city gas businesses in 2007. Its late start in the city gas business, compared with other large operators in China, meant it expanded with many investments in joint ventures and associate companies. CRG's ownership in its city gas partnerships and projects is lower on average than those of its peers, which limits its ability to access the cash flows of these entities, although CRG has implemented a cash pooling system across most of the group's companies, which mitigates this issue to a degree.

At the same time, Fitch believes CRG has reduced such structural subordination through the company's strategy of increasing its stakes in its joint ventures and associate companies during the past few years. Fitch monitors CRG's structural subordination through the contribution to the company's results from joint ventures and associates, and the split between the profits attributable to CRG's owners and that to non-controlling stakes. The profit attributable to the owners of the company as reported in its financial statements less the share of results from joint ventures and associates as a percentage of total profit has been improving.

In 1H15, the profit attributable to the owners of the company less the share of results from joint ventures and associates as a percentage of total profit was 54%, compared with 40% in 1H13. In absolute terms, the profit attributable to the owners of the company less the share of results from joint ventures and associates reached HKD1.09bn in 1H15 compared with HKD594m in 1H13.

CRG's management has indicated that it is still focused on acquisitions of new projects and increasing its ownership in JV companies via capital injections. Such capital investments are likely to remain high through 2018. Although natural gas sales in China have slowed as economic growth in China decelerates, Fitch expects CRG's funds flow from operations (FFO) to net adjusted debt is likely to remain comfortably below 2x (2014: 1.5x), and FFO fixed charge coverage remain above 6x (2014: 6.6x), which are strong for its ratings.