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Edited Transcript of 603.HK earnings conference call or presentation 27-Aug-19 3:00am GMT

Half Year 2019 China Oil and Gas Group Ltd Earnings Call (Chinese, English)

Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of China Oil and Gas Group Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 3:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jenny Law

China Oil and Gas Group Ltd.

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Conference Call Participants

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* Justin Ong

Columbia Threadneedle - Analyst

* Evelyn Jung

Citi - Analyst

* Jane Tan

HSBC - Analyst

* Wei Ling

Principal Global Investors - Analyst

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Presentation

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Unidentified Company Representative [1]

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(Interpreted) Good morning, good afternoon. Welcome to the conference call. The chairperson today is [John]. John, please begin your call and I will be standing by for the Q&A session. Thank you.

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Unidentified Company Representative [2]

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Thank you, operator. Ladies and gentlemen, on behalf of China Oil and Gas Group, it is with pleasure for me to welcome you all to our 2019 interim results conference call. Today we will have our CFO, Ms. Jenny Law, to present the Group's 2019 interim results.

Our presentation material for today has been uploaded to our official website at [www.hk603.com/investorrelations/roadshowpresentations], or you can also access it through the link's attached email or announcement email earlier this morning.

We will first talk about the financial highlights and performance of the Group, followed by the operating performance of our core business, natural gas distribution business and then our upstream oil and gas production business in Canada. The presentation will take around 20 minutes and we will have a Q&A session at the end. Now please allow me to introduce you the CFO of China Oil and Gas Group Limited, Ms. Jenny Law.

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Jenny Law, China Oil and Gas Group Ltd. [3]

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Good morning and thank you for joining China Oil and Gas Group's 2019 first-half results investor conference call. If you have your presentation, please flip to page 3. On page 3 is a summary of the major highlights of the Group for the first half of 2019. Total revenue increased by 4% to HKD5,147 million. The major reason for the increase of total revenue was due to the sales and transmission of natural gas increased by 16% for the six-month period.

Revenue from sales and distribution of natural gas and other related products continue to be the Group's major segment, contributed 90% of the total revenue and recorded a 9% growth. Net assets of the Group as of June 30, 2019 was HKD6,281 million, representing a 6% growth as compared to the end of 2018.

On page 4, the decrease of gross profit and profit margin were due to the decrease of construction income [reckoning]. The Group connected 118,000 (inaudible) gas residential users in the first half of 2018 in Shandong province and the total connection in the first half of 2018 was 59,000. For the first six months of 2019 our total connections for residential users was 49,000.

For the same reason profit attributable to owners of the Company was HKD203 million, 6% decrease as compared to the last period. But after we take away those one-off items, namely recovery of impairment of PPE in 2018 and other gains as shown on page 5, the profit attributable to the owners of the company actually increased by 3%.

On page 6 and 7, the Group's principal activities are divided into three segments. First, sales and distribution of natural gas and other related products. With the increase of the Group's natural gas sales and transmission volume to 2.552 cubic meters in 2019, sales and distribution of natural gas contributed the most to the Group's revenue.

Sales and distribution of natural gas continue to be the Group's principal source of revenue and constitute 90% of the total revenue, in 2018 86%. Revenue related to this segment recorded an increase of 9% and segment results increased by 3% to HKD424 million from 2018 HKD414 million.

For the gas pipeline construction in connection segment, as the natural gas distributor, the Group places tremendous emphasis on the sales of natural gas. With our natural gas sales volume increasing significantly for the past few years, revenue on gas pipeline connections only contributed around 6% of our total revenue in 2019.

Our third segment, exploitation and production of crude oil and natural gas. Revenue related to exploitation and production amounted to HKD219 million, was HKD237 million in 2018 with a decrease of 7%. The main reason was the crude oil price [lightly] dropped in 2019 with WTI averaging USD57.38 per barrel compared to USD65.41 per barrel in the first half of 2018.

The 12% decrease in the WTI price in the first half of 2019 was due to increased crude oil production in the United States, generally higher level of crude oil in inventory in 2019, and global economic concerns. The Group realized crude oil price of CAD67.87 per barrel in 2019 compared to 2018 CAD74.06 per barrel. Natural gas price increased 11% in 2019 due to extremely cold weather in the first quarter of 2019 and the associated natural gas inventory withdrawals.

On page 8, as for past few years the Group continued to put in (inaudible) for cost-saving. Sales and distribution costs together with administrative expenses only represent 3.95% of total revenue in 2019, where it was 4.19% 2018.

On page 9 is a breakdown for the calculation of EBITDA. EBITDA slightly decreased 4% to HKD920 million from HKD957 million as compared to the first half of 2018.

On page 10, net assets of the Group, up 6% to HKD6.3 billion by the end of the period. Cash and cash equivalents and total debt both recorded a decrease. The Group's total indebtedness including bank borrowings, other borrowings and senior notes was HKD6.49 billion and was HKD6.55 billion by the end of 2018.

Total available credit facility is amounted to HKD4.9 billion as of June 30, 2019 with a utilization rate of 23%. Financial expenses slightly increased 5% to HKD174 million for the period. The Group's debt to asset ratio measured on the basis of total indebtedness divided by total asset was 41%, the same in 2018. As of June 30, 2019 the Group's current liability exceeds their current assets by HKD1.9 billion.

The ability of the Group to continue as a growing concern is dependent of the Group's ability to generate positive cash flow. On July 18, 2019 the Group has issued senior notes with an aggregate nominal value of USD320 million, equivalent to HKD2.5 billion.

So, the Board is confident that the Group will have adequate financial resources to meet our financial obligation as (inaudible). Cash flow from operating activities for the period were HKD451 million and was HKD404 million in 2018. CapEx HKD427 million and was HKD510 million during 2018.

Now let's move to operating performance of natural gas distribution business in China. On page 12 and 13, the Group recorded a total gas sales and transmission volume of 2.55 billion cubic meters for the period of the first six months of 2019 with an increase of 16% as compared to the last period. Among the total volume growth, residential usage recorded an increase of 16%. Transmission volume also recorded significant growth of 54%.

On page 14, all category of user of natural gas will remain [stable]. C&I users constituted 62% of the total gas sales volume, residential constituted 28% and gas stations was 10% in the first half of 2019.

On page 15 was the breakdown of sales volume from different provinces. As shown on the chart, most provinces recorded a significant growth in sales volume. Major lead provinces were Jiangsu, Jiangxi, Shanxi and Hubei. Qinghai Province gas sales proportion reduces continuously to 42.5% in 2019 while other provinces are catching up. This helped to optimize the Group's sales structure on the sales of the natural gas business.

On page 16, for the first half of 2019 the average selling price was RMB1.94, and average purchase price was RMB1.5 per cubic meter. The Group's average dollar margin increased 5% to RMB0.44 per cubic meter.

On page 17, during the first six months of 2019, the Group has connected 49,346 new residential users, 557 new C&I users. The accumulated connections of residential users was close to 1.4 million and for C&I users the accumulated connections were 12,369, which represent an increase of 4% and 5% respectively.

On page 18, in the first half of 2019 the government issued a series of favorable policies which would benefit gas distributors. First, allowing wholly foreign owned enterprise conduct the operations of oil and gas exploration and exploitation by removing the previous restriction that such operation can only be conducted in the form of joint ventured cooperation.

Second, allowing foreign investor to hold the majority of equity interest in operations of urban gas and heat supply pipeline networks of cities with a population of 0.5 million or above by removing the previous restriction that such operation must be under the control of domestic investor.

Third, announcing the establishment of state oil and gas pipeline networks, which is expected to provide more gas source choices for downstream natural gas operators.

In addition, the Chinese-Russian eastern natural gas pipeline has been successfully connected and the gas transmission is expected to commence by the end of the year. A [plan] put into full operation, this pipeline is expected to supply 38 billion cubic meters of natural gas to China per year.

As of now, China has become the world's second-largest LNG importer with the total reception capacity of LNG terminals existing 80 million tonnes per year and expect to reach 100 million tonnes by 2025.

All of the above factors will contribute to the formations of diversified gas sources landscape in the natural gas market in China and in turn bring in plenty of opportunities to the natural gas sector where the Group operates.

On page 19, up to now the Group owns 71 concession rights with business operations in 16 provinces; natural gas pipelines reach 12,572 km.

Now let's talk about the operating performance of exploitation and production business in Canada. Page 21, as of the end of 2018 the Group has proven plus probable reserves of 39 million Boe with a growth of 12% as compared to the end of was 2017. Average daily production was 5,577 Boe per day. The average operating net back value was CAD27 per Boe, which was CAD 29.52 per Boe in the same period last year.

On page 22, the Group maintained prudent planning for the development of the oil and gas segment. We drilled three net wells with successful rates of 100% and kept operating expense per Boe at below CAD10.

That's all I have prepared for the presentation of today. Please feel free to raise any questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). (Inaudible), China (inaudible).

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Unidentified Analyst [2]

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Good morning, Jenny. I would like to ask a question on page 7, the gross profit margin by segment breakout. And can you elaborate more on each segment on why are the gross profit margin reduced from last year?

And the second one, would you mind to repeat the reconciliation of the recurring profit by taking out the one-off item, because I didn't quite get that part?

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Jenny Law, China Oil and Gas Group Ltd. [3]

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Okay, thank you. For the GP on page 7, the decrease of the GP profit margin per sector -- for the Canadian business is because of the oil price drop and I've mentioned that in our page -- at the back of the presentation, that the WTI average was USD65 and was USD75 in the last period. So, that's why we have a drop in the profit margin.

And for the connection part, we actually have increased on the gross profit margin. But the absolute number of the revenue has been decreased. And for the sales and distribution of natural gas it's just a profit mixture that changed a little bit on that part.

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Unidentified Analyst [4]

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So, it's primarily due to the drop in oil price for the Canadian business?

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Jenny Law, China Oil and Gas Group Ltd. [5]

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No, for the total GP, the decrease will be the decrease of the construction income.

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Unidentified Analyst [6]

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Okay, okay.

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Jenny Law, China Oil and Gas Group Ltd. [7]

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Yes, the construction income was 427 million in 2018 and we only have around 300 million for the revenue and 2019 first half. That's the major reason and because the construction income has -- the profit margin was around 50%, so it will -- lower than our gross profit margin overall.

And for the reconciliation, it's on page 9. On page 9 you can see the chart, the earnings before tax and then we add back -- sorry, page 5, sorry, page 5 -- can see the recurring profit attributable to owners of the Company show the reconciliation. The profit for the period and we add back the gains, other gains that we usually have to add back because it will not be recurring for every year. And then there is a recovery of impairment and PPE -- of PPE in 2018 first half.

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Unidentified Analyst [8]

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Okay, so basically we subtract those recovery of impairment of PP&E and also some disposal (multiple speakers)?

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Jenny Law, China Oil and Gas Group Ltd. [9]

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(multiple speakers). Yes.

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Unidentified Analyst [10]

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Okay.

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Operator [11]

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(Operator Instructions). Justin Ong, Columbia Threadneedle.

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Justin Ong, Columbia Threadneedle - Analyst [12]

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I missed the first part of the presentation. Can I find out what are your thoughts about the gross profit margin going forward over the next one year? Noting that you did mention that the decreasing construction (inaudible) the reason for the drop in the gross profit margin in H1. So, I'm just wondering -- how do you see this panning out over the next 12 months?

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Jenny Law, China Oil and Gas Group Ltd. [13]

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For the GP profit, because the construction income, the portion of the GP -- they have a GAAP -- the higher rate of GP, close to 50%. So, when our revenue dropped by around HKD100 million, the gross profit, [our actual] numbers will decrease. So, this is the major reason.

And for the other, the exploitation and production of crude oil and natural gas, it really depends on oil price and it only contributed around 6% of our total revenue. And our major part will be the sales and distribution of natural gas and it contributed 90% of our total revenue.

And imagine it's actually quite stable. And you can see from the back of our presentation that our ASP and Approximately -- that's on page 16, you can see our margin on our natural gas, our major revenue part is actually increased. So, we can see for the next 12 months the margin will be stable.

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Operator [14]

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[Evelyn Jung], Citi.

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Evelyn Jung, Citi - Analyst [15]

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I have two questions. The first question is can I have your CapEx plan for the second half of 2019? And my second question is -- is there any recent updates regarding the potential connection fee cut policy? Thanks.

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Jenny Law, China Oil and Gas Group Ltd. [16]

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CapEx plan for the second half we remain our CapEx guidance at the beginning of the year. The total CapEx will be around HKD1 billion and HKD200 million will be from the Canadian operation and the remaining HKD800 million will be on our [PRC] natural gas distribution.

And your second question, for the removal of the connection fee, for us we don't think it's a very major problem because it only constitutes around 6% of our total revenue. And even if (inaudible) we will just sell our natural gas in the PRC operation. And we didn't see the connection fee cuts. We actually decreased the gross profit margin because it (inaudible) the return of 10%, it actually [increased] a lot of other things. So, we are still under discussion on this part. Does that answer your question?

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Evelyn Jung, Citi - Analyst [17]

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Yes, thank you very much.

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Operator [18]

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[Vincent], (inaudible).

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Unidentified Analyst [19]

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Good morning and thank you for the presentation. I just had a quick question. Just going back to the construction income, could you just give us a little bit of a trend of what you're seeing there? Is this somewhat of a one-off or do you expect that construction income to remain a little bit more volatile going forward?

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Jenny Law, China Oil and Gas Group Ltd. [20]

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Construction income, you can say it is a one-off thing, because we just received the construction fee at the very beginning of the construction, [right]. So, what we see is that we just maintain our target to connect 100,000 residential users per year and that's our target, yes.

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Unidentified Analyst [21]

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So, would you expect that to pick up in the second half or you would continue at levels you are seeing now?

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Jenny Law, China Oil and Gas Group Ltd. [22]

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Because the last year our total connection was close to 100,000 and the total revenue for last year for connection fee is only around HKD520 million. So, we think the next half and 2019 we should have around HKD200 million to HKD300 million on connection fee. So, the full-year will be around the same with the full year of 2018.

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Operator [23]

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Jane Tan, HSBC.

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Jane Tan, HSBC - Analyst [24]

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I have a question on the connection part. So, would we expect around HKD500 million going forward for this segment?

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Jenny Law, China Oil and Gas Group Ltd. [25]

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For the full year, yes.

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Jane Tan, HSBC - Analyst [26]

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Yes, for the full year?

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Jenny Law, China Oil and Gas Group Ltd. [27]

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Yes, around HKD500 million.

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Jane Tan, HSBC - Analyst [28]

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Okay, so we don't see any future growth opportunity for this part?

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Jenny Law, China Oil and Gas Group Ltd. [29]

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Well, because all of the regulations are still under discussion. And we will -- we are not sure when we'll have some new policy on this connection fee. So, we just -- for our forecast we just use the same number in 2018.

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Operator [30]

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[Sylvia], Aberdeen Standard.

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Unidentified Analyst [31]

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I probably have a few questions on the holdco of your numbers. And I know how much cash and debt is now sitting at the holdco level as related to the debt over there with the interest expense. Thank you.

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Jenny Law, China Oil and Gas Group Ltd. [32]

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Okay. For the holdco, the cash constituted around -- 15% of the cash is on holdco and the debt with the two senior notes is around HKD5 billion. And the interest that we pay on the first half of 2019 will be around HKD107 million -- for the whole Group.

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Unidentified Analyst [33]

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Roughly what's the overhead expense at the holdco level?

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Jenny Law, China Oil and Gas Group Ltd. [34]

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Around HKD20 million for the whole year.

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Operator [35]

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(Operator Instructions). [Jocelyn], [Amonde].

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Unidentified Analyst [36]

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I just have two questions. I missed out on the level of holdco cash that you talked about earlier. What was the level? And the other question is on the volume growth expectation for the full year of 2019. What is your guidance for the full year of 2019?

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Jenny Law, China Oil and Gas Group Ltd. [37]

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Thank you. Cash level at the holdco is 15% of the total cash and cash equivalents. And for the guidelines we said 15%, and that will be 15% for the whole year of 2019 as well -- sales and transmission volume.

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Unidentified Analyst [38]

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1-5, right, including transmission volume?

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Jenny Law, China Oil and Gas Group Ltd. [39]

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Yes.

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Operator [40]

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[Wei Ling], Principal Global Investors.

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Wei Ling, Principal Global Investors - Analyst [41]

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Do we expect dividends from [CC&G] this year and, if so, how much?

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Jenny Law, China Oil and Gas Group Ltd. [42]

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We already collected a dividend from CC&G for 2019. We just collected during July and it is around HKD100 million.

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Wei Ling, Principal Global Investors - Analyst [43]

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Okay, so do we expect HKD100 million every year going forward?

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Jenny Law, China Oil and Gas Group Ltd. [44]

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Yes, around there. They have to pay out 50% of their [product].

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Operator [45]

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(Operator Instructions). John and Jenny, we do not have other questions at this point in time.

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Unidentified Company Representative [46]

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Thank you. As we have no further questions for now, I would like to bring our meeting to an end. If you have any follow-up questions, please feel free to contact us at info@HK603.com or call us at 22002000. Thank you very much for joining us here today and our Group appreciates your continued support. We wish you all a splendid day ahead. Thank you and goodbye.

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Operator [47]

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Thank you for your participation. We conclude the conference. Goodbye.