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3 . National policies on environmental protection, accelerated execution on coal-to-gas projects for local governments and sufficient gas supply all combined to stimulate gas consumption. Environmental protection pressure will be the major driver for gas consumption in the coming years. In March 2017, the Ministry of Environmental Protection of the People'

s Republic of China (MEP), the National Development and Reform Commission (NDRC), the Ministry of Finance, and governments of six relevant provinces and municipalities, issued the

2017 Work Plan on The Prevention and Control of Atmosphere Pollution in the Beijing, Tianjin and Hebei Areas and Surrounding Regions , clearly specifying the 2+26 key areas for implementing coal-to-gas conversion . On the other hand, the need to adjust energy consumption structure will also drive natural gas consumption. NDRC and

13 central authorities jointly issued The Opinions on Accelerating the Use of Natural Gas in July 2017, which plans to develop natural gas into one of the major types of energy in China'

s modern clean energy system. We expect that such policies will strongly drive gas consumption in northern China. More coal to gas projects are on the way, Company Report See the last page for disclaimer Page

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2 ] HK and China Gas 中华煤气 (00003 HK) [Table_PageHeader] HK and China Gas (00003 HK) and coal to gas projects account for a significant part of newly installed capacity for industrial/commercial customers. The Company had a total of

131 city-gas projects across

23 provinces, municipalities and autonomous regions throughout mainland China and one of the largest customer groups among gas distribution companies. We expect the Company to benefit greatly from favorable policy environments. Total sale of natural gas increased by 13% yoy to 9.72 billion m

3 in the first half of 2017, which was higher than our previous estimation. Hence, we revise up natural gas sales assumptions of the Company. Revise down gas dollar margin assumptions of the Company. After the gas price reform which took place in 2015, the price difference between legacy and incremental gas was removed. The price adjustments will not have a structural impact on the purchase costs of the Company and has made gas dollar margins of gas distribution companies much more stable. On the other hand, the implementation of a step pricing mechanism will help to raise the dollar margin of residential customers. Hence, we expect the gas dollar margin of the Company to remain at a stable level in 2017-2019. However, the Company had to offer preferential prices in some instances to secure large industrial customers. Additionally, in order to stimulate the use of gas, gas sold to coal to gas customers is usually lower in price. Hence, gas dollar margin of coal to gas customers is usually lower than that of normal industrial customers. Hence, we revise down gas dollar margin assumptions of the Company due to customer group mix change. Maintain connection service revenue assumptions unchanged. The Company connected about 1.05 million new residential customers in the first half of 2017, which was generally in line with our estimation. Revenue contributed by connection business increased by 1.1% yoy to HKD$ 1.28 billion. The Company is expected to continue to add more customers as current gas penetration rate remains low and more gas projects are acquired. The Company still holds gr........