HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

We came out of the post-1H21 result call 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> with unchanged positive view, and the message from management suggested that outlook for 2H21 stay promising and the pull-back in share price is unwarranted. We increased our earnings forecasts and based on our latest projections, Kunlun is trading on just 9.2x PER for FY21 (on continuing operations), making it the cheapest among China's gas utilities stocks.We think the good new project momentum, stable margin outlook, commencement of new projects, better profitability at LNG terminals and stronger LPG volume are the major drivers for Kunlun. We estimate an ROE of 10.6% for FY21, and yet it will still be in a net cash position at end-FY21, which compares well with most peers which are at much higher leverage levels.

We came out of the post-1H21 result call of Kunlun Energy (135 HK) with unchanged positive view, and the message from management suggested that outlook for 2H21 stay promising and the pull-back in share price is unwarranted. We increased our earnings forecasts and based on our latest projections, Kunlun is trading on just 9.2x PER for FY21 (on continuing operations), making it the cheapest among China's gas utilities stocks.We think the good new project momentum, stable margin outlook, commencement of new projects, better profitability at LNG terminals and stronger LPG volume are the major drivers for Kunlun. We estimate an ROE of 10.6% for FY21, and yet it will still be in a net cash position at end-FY21, which compares well with most peers which are at much higher leverage levels.

Kunlun Energy (135 HK): Quick Take After Post-1H21 Call, Stays Positive

We see the 1H21 earnings report of <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 a healthy one, given a 18.4% YoY growth in core earnings. Its gross margin contracted 0.7pp YoY with only gas wholesale segment recording margin expansion. In particular, just 11% growth in retail gas gross profit and a Rmb0.05/cu.m. or about 8.2% YoY contraction in dollar margin are concerns.Management expects slower gas sales growth in 2H21 with stable margin. It secured 4 new city-gas projects in 1H21 which looks slow, though the integrated energy segment has 16 new projects. While the 1H21 result itself is not bad, we think its 20.6x PER for FY21 does not provide much upside potential from current level. After a 45% rally YTD and only 9.2% off all-time high, we see risk that ENN is vulnerable to profit-taking in the near term, based on the excuse of weaker-than-expected retail gas business.

We see the 1H21 earnings report of ENN Energy (2688 HK) is a healthy one, given a 18.4% YoY growth in core earnings. Its gross margin contracted 0.7pp YoY with only gas wholesale segment recording margin expansion. In particular, just 11% growth in retail gas gross profit and a Rmb0.05/cu.m. or about 8.2% YoY contraction in dollar margin are concerns.Management expects slower gas sales growth in 2H21 with stable margin. It secured 4 new city-gas projects in 1H21 which looks slow, though the integrated energy segment has 16 new projects. While the 1H21 result itself is not bad, we think its 20.6x PER for FY21 does not provide much upside potential from current level. After a 45% rally YTD and only 9.2% off all-time high, we see risk that ENN is vulnerable to profit-taking in the near term, based on the excuse of weaker-than-expected retail gas business.  

ENN Energy (2688 HK): Concerns on Margin Squeeze, Key Takeaways from Post-Result Call

Despite the good share price performance after going ex-dividends, <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> still has significant upside potential, in our view. YTD, industry and peer figures have already showed a very solid underlying picture of China's gas consumption market. We updated our financial projections to incorporate the good 1Q21 result of Kunlun Gas, particularly to reflect the lower-than-expected minority interests which means that its wholly-owned subsidiaries are more profitable than non-wholly-owned which is a fact likely to be missed by the market.We project 3-year EPS CAGR of 20% for Kunlun's continuing operations, with ROE of 10.9% for FY22; and the stock trades on just 10.9x PER for FY21F and 0.9x P/B for FY22F. Such growth, return and valuation metrics clearly put the stock in an attractive zone relative to the peers' multiples - average sector growth is 15.9% at PER of 15.6x and average ROE of 17.7% at 2.2x P/B. More importantly, we see its net cash over the next two years to amount to 26-37% of the current share price.

Despite the good share price performance after going ex-dividends, Kunlun Energy (135 HK) still has significant upside potential, in our view. YTD, industry and peer figures have already showed a very solid underlying picture of China's gas consumption market. We updated our financial projections to incorporate the good 1Q21 result of Kunlun Gas, particularly to reflect the lower-than-expected minority interests which means that its wholly-owned subsidiaries are more profitable than non-wholly-owned which is a fact likely to be missed by the market.We project 3-year EPS CAGR of 20% for Kunlun's continuing operations, with ROE of 10.9% for FY22; and the stock trades on just 10.9x PER for FY21F and 0.9x P/B for FY22F. Such growth, return and valuation metrics clearly put the stock in an attractive zone relative to the peers' multiples - average sector growth is 15.9% at PER of 15.6x and average ROE of 17.7% at 2.2x P/B. More importantly, we see its net cash over the next two years to amount to 26-37% of the current share price.

Kunlun Energy (135 HK): Updated Financial Projections Point to Still Very Undemanding Valuations

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

This is a warning insight. It is not actionable per se. It is designed to be informative. The dividend payment ex-dates are confusing. Some people are confusing. This insight hopes to put that right in the safest way possible so investors do not make an error on what will be a one-time 30% dividend.

This is a warning insight. It is not actionable per se. It is designed to be informative. The dividend payment ex-dates are confusing. Some people are confusing. This insight hopes to put that right in the safest way possible so investors do not make an error on what will be a one-time 30% dividend. 

Kunlun Energy (135) - Be Careful Of The Special Div Dates

Last year, the major gas pipeline companies owned by the SOEs all announced they were selling their intercity infrastructure and port offloading and storage operations to a new SOE called PipeChina. A few SOEs signed Sale and Purchase agreements in mid-2020. <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> signed theirs in December. For Kunlun, that agreement went through at the end of March. The bulk of the payment should have gone through at the end of April, and When Kunlun reported its earnings in late March, it reported full-year on an ongoing basis with the Discontinued Assets representing a different set of numbers. At that point, Kunlun became an energy distribution company which was primarily a city gas company, and a big pile of cash. As <a href="https://www.smartkarma.com/profiles/osbert-tang-cfa" target="_blank" data-smartkarma-citation="accounts:3879" rel="noopener">Osbert Tang, CFA</a> discussed in <a href="https://www.smartkarma.com/insights/kunlun-energy-135-hk-a-fantastic-1q21-at-kunlun-gas" target="_blank" data-smartkarma-citation="insights:50930" rel="noopener">Kunlun Energy (135 HK): A Fantastic 1Q21 at Kunlun Gas</a> the largest contributor to the remaining business had a "fantastic Q1". Year-on-year results this year were always going to be "good" simply because of the growth from start of year to end of year in 2020. Straightline serial no-growth in 2021 would still have resulted in year-on-year growth, which itself seemed not to be in the minds of analysts looking at the pro-forma post-sale Kunlun. Surprisingly, since the announcement in December that the trade had been done, while Kunlun is up, because others are up just as much, the relative cheapness of Kunlun vs peers has actually increased.Below are data/visualizations suggesting how to look at Kunlun today.

Last year, the major gas pipeline companies owned by the SOEs all announced they were selling their intercity infrastructure and port offloading and storage operations to a new SOE called PipeChina. A few SOEs signed Sale and Purchase agreements in mid-2020. Kunlun Energy (135 HK) signed theirs in December. For Kunlun, that agreement went through at the end of March. The bulk of the payment should have gone through at the end of April, and When Kunlun reported its earnings in late March, it reported full-year on an ongoing basis with the Discontinued Assets representing a different set of numbers. At that point, Kunlun became an energy distribution company which was primarily a city gas company, and a big pile of cash. As Osbert Tang, CFA discussed in Kunlun Energy (135 HK): A Fantastic 1Q21 at Kunlun Gas the largest contributor to the remaining business had a "fantastic Q1". Year-on-year results this year were always going to be "good" simply because of the growth from start of year to end of year in 2020. Straightline serial no-growth in 2021 would still have resulted in year-on-year growth, which itself seemed not to be in the minds of analysts looking at the pro-forma post-sale Kunlun. Surprisingly, since the announcement in December that the trade had been done, while Kunlun is up, because others are up just as much, the relative cheapness of Kunlun vs peers has actually increased.Below are data/visualizations suggesting how to look at Kunlun today. 

Kunlun Energy (135 HK) Approaching The Special Div - Still The Wrong Price

China

Bestsun Energy Co., Ltd is a natural gas distributor. The Company invests in natural gas pipelines, liquefied natural gas, and natural gas vehicle fillings stations. Bestsun also provides gas appliances, installations, and maintenances.

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Bestsun Energy Co (600681 CH)

Kunlun Energy (135 HK): Quick Take After Post-1H21 Call, Stays Positive

Our impression on Kunlun remains unchanged after the post-1H21 result call. Outlook is still encouraging and new project momentum is solid. Our...

Osbert Tang, CFA

ENN Energy (2688 HK): Concerns on Margin Squeeze, Key Takeaways from Post-Result Call

ENN's has a healthy 1H21 but the concerns are the slow growth in retail gas segment and the sharp contraction in margin. With 45% YTD rally and at...

Osbert Tang, CFA

Kunlun Energy (135 HK): Updated Financial Projections Point to Still Very Undemanding Valuations

Our updated financial projections, referencing its valuation relative to peers, point to the fact that there is still very significant upside...

Osbert Tang, CFA

Kunlun Energy (135) - Be Careful Of The Special Div Dates

Kunlun's Special Div is upon us. BE CAREFUL OF YOUR DATES. There appears to be some confusion out there. Check and double check the docs and your...

Travis Lundy

Kunlun Energy (135 HK) Approaching The Special Div - Still The Wrong Price

Kunlun has outperformed its peers since the announcement of the disposal of its pipeline business. There is one week til the ex-date of the special...

Travis Lundy

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