HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>Despite <a href="https://www.smartkarma.com/entities/china-gas-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14315:1" rel="noopener">China Gas Holdings (384 HK)</a>'s marginal 3.8% drop in 1H FY25 net profit, it has rebounded from a 25.8% collapse in FY24. It maintained an interim DPS of HK$0.15.</li>
<li>Dollar margin expanded Rmb0.02/cu.m. and gross margin was up 0.8pp. Profit from value-added services grew 15.4%, though overall earnings are dragged by LPG and JVs.</li>
<li>FY25 is a year of profit recovery. Its improving cash flow, reduction in capex, and stronger balance sheet should support a stable dividend, putting it on a 7.8% yield.  </li>
</ul>


Despite China Gas Holdings (384 HK)'s marginal 3.8% drop in 1H FY25 net profit, it has rebounded from a 25.8% collapse in FY24. It maintained an interim DPS of HK$0.15.
Dollar margin expanded Rmb0.02/cu.m. and gross margin was up 0.8pp. Profit from value-added services grew 15.4%, though overall earnings are dragged by LPG and JVs.
FY25 is a year of profit recovery. Its improving cash flow, reduction in capex, and stronger balance sheet should support a stable dividend, putting it on a 7.8% yield.  


China Gas Holdings (384 HK): Earnings Have Stabilised

<ul>
<li>The spin-off of the value-added business (VAS) of <a href="https://www.smartkarma.com/entities/china-gas-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14315:1" rel="noopener">China Gas Holdings (384 HK)</a> may add HK$0.22-0.83/share to the stock price, or 3.4-12.8%, based on our initial assessment.</li>
<li>VAS generated an operating profit of HK$1.58bn in FY24, up by 5.7% YoY. It is significant to China Gas as this accounted for 23.5% of its total segment profit.</li>
<li>The share price has not reacted much to the news because weak Chinese equity market and uncertainties on the upcoming 1H FY25 result. Once cleared, we see good upside.</li>
</ul>


The spin-off of the value-added business (VAS) of China Gas Holdings (384 HK) may add HK$0.22-0.83/share to the stock price, or 3.4-12.8%, based on our initial assessment.
VAS generated an operating profit of HK$1.58bn in FY24, up by 5.7% YoY. It is significant to China Gas as this accounted for 23.5% of its total segment profit.
The share price has not reacted much to the news because weak Chinese equity market and uncertainties on the upcoming 1H FY25 result. Once cleared, we see good upside.


China Gas Holdings (384 HK): Assessing the Spin-Off of Value-Added Business

<ul>
<li>Dismal share price performance for <a href="https://www.smartkarma.com/entities/china-gas-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14315:1" rel="noopener">China Gas Holdings (384 HK)</a> has created an opportunity for bottom fishing. Management also looks positive with 30% profit growth guidance for FY23.</li>
<li>There are rooms for good dollar margin recovery, unit sales rebound and improvement in free cash flow in FY24. Spin-off of value-added services is also a value-enhancing move. </li>
<li>De-Rating over the last three years has put the stock on undemanding multiples of 8x PER and 0.75x P/B. Its 14.8% 3-year EPS CAGR is also better than sector average.</li>
</ul>


Dismal share price performance for China Gas Holdings (384 HK) has created an opportunity for bottom fishing. Management also looks positive with 30% profit growth guidance for FY23.
There are rooms for good dollar margin recovery, unit sales rebound and improvement in free cash flow in FY24. Spin-off of value-added services is also a value-enhancing move. 
De-Rating over the last three years has put the stock on undemanding multiples of 8x PER and 0.75x P/B. Its 14.8% 3-year EPS CAGR is also better than sector average.


China Gas Holdings (384 HK): Worth a Bet Now

<ul>
<li>Core earnings of <a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a> rose 25.2% in FY22, providing solid evidence for its strength against peers. We are delighted to see dollar margin even expanded 4.1%.</li>
<li>Pace of new project addition has not weakened as it secured 25 new projects in FY22. Collectively, they will increase sales volume by 3.2bn cu.m., 7% of FY22 volume.</li>
<li>Net cash of Rmb13.6bn equals 28% of share price, making 8.9% ROE look decent. Market earnings forecast is too low; and even so, it trades on just 7.2x FY23 PER.</li>
</ul>


Core earnings of Kunlun Energy (135 HK) rose 25.2% in FY22, providing solid evidence for its strength against peers. We are delighted to see dollar margin even expanded 4.1%.
Pace of new project addition has not weakened as it secured 25 new projects in FY22. Collectively, they will increase sales volume by 3.2bn cu.m., 7% of FY22 volume.
Net cash of Rmb13.6bn equals 28% of share price, making 8.9% ROE look decent. Market earnings forecast is too low; and even so, it trades on just 7.2x FY23 PER.


Kunlun Energy (135 HK): Rock Solid as Usual

<ul>
<li>
<a href="https://www.smartkarma.com/entities/enn-energy-holdings-ltd" target="_blank" data-smartkarma-citation="entities:316:1" rel="noopener">ENN Energy (2688 HK)</a> is not required to submit a merger control filing to the SAMR, suggesting it is making a step ahead in meeting the pre-conditions. </li>
<li>The use of onshore bank loans and cash balance as a refinancing source and consideration payment will lower financing costs, boosting the value of ENN Natural Gas H-share.</li>
<li>The current share price is 9.3 and 17.7% below the low-bound and high-bound of our estimated value range. It is also less vulnerable to the current tariff war.</li>
</ul>



ENN Energy (2688 HK) is not required to submit a merger control filing to the SAMR, suggesting it is making a step ahead in meeting the pre-conditions. 
The use of onshore bank loans and cash balance as a refinancing source and consideration payment will lower financing costs, boosting the value of ENN Natural Gas H-share.
The current share price is 9.3 and 17.7% below the low-bound and high-bound of our estimated value range. It is also less vulnerable to the current tariff war.


ENN Energy (2688 HK): Privatisation Progressing Well Ahead

Hong Kong

China Gas Holdings Ltd. invests in, operates and manages natural gas distribution pipelines.  The Company distributes and sells natural gas to residential, commercial and industrial users, and bottles and sells compressed natural gas.  China Gas also constructs and operates gas stations.

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China Gas Holdings (384 HK)