HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Except <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>, many stocks in the China gas utilities sector are still underperforming the HSI and HSCEI YTD. Yet, industry fundamentals are improving. </li>
<li>More cities and counties will implement a gas price pass-through mechanism, with 90% of cities and counties to be completed by late 2024, benefiting sector profitability.  </li>
<li>Consensus forecasts are still conservative which places room for pick-up in share prices. <a href="https://www.smartkarma.com/entities/china-resources-gas-group-ltd" target="_blank" data-smartkarma-citation="entities:20525:1" rel="noopener">CR Gas (1193 HK)</a> and <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> are opportunities.</li>
</ul>


Except ENN Energy (2688 HK), many stocks in the China gas utilities sector are still underperforming the HSI and HSCEI YTD. Yet, industry fundamentals are improving. 
More cities and counties will implement a gas price pass-through mechanism, with 90% of cities and counties to be completed by late 2024, benefiting sector profitability.  
Consensus forecasts are still conservative which places room for pick-up in share prices. CR Gas (1193 HK) and China Gas Holdings (384 HK) are opportunities.


Equity Bottom-Up

<ul>
<li>
<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>'s 2.2% drop in core earnings in FY23 is distorted by the expiry of exploration rights of oilfield projects. All other segments have done well.  </li>
<li>FY24 outlook is positive - reduction in E&amp;P distortion, addition of more city gas projects, higher utilisation of LNG plants and terminals, and optimisation of gas pricing mechanism.</li>
<li>Net cash of Rmb20.4bn equals 29% of market capitalisation, providing room for a higher dividend payout. A re-inclusion into the HSI is not totally out of the cards.</li>
</ul>



Kunlun Energy (135 HK)'s 2.2% drop in core earnings in FY23 is distorted by the expiry of exploration rights of oilfield projects. All other segments have done well.  
FY24 outlook is positive - reduction in E&amp;P distortion, addition of more city gas projects, higher utilisation of LNG plants and terminals, and optimisation of gas pricing mechanism.
Net cash of Rmb20.4bn equals 29% of market capitalisation, providing room for a higher dividend payout. A re-inclusion into the HSI is not totally out of the cards.


Kunlun Energy (135 HK): Delivering Resilience

<ul>
<li>With an 18.6% growth in 1H22 profit from continuing operations, <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> has not disappointed us. Natural gas sales segment is a bright spot with solid growth.</li>
<li>Net cash swelled to Rmb10.2bn at end-Jun, about 2x more than the level at end-FY21. We estimate this roughly equals to 19% of the current share price. </li>
<li>New project momentum looks healthy and the market seems to have underestimated FY22 earnings. Its 8x and 7.5x PERs for FY22 and FY23 are clearly attractive. </li>
</ul>


With an 18.6% growth in 1H22 profit from continuing operations, Kunlun Energy (135 HK) has not disappointed us. Natural gas sales segment is a bright spot with solid growth.
Net cash swelled to Rmb10.2bn at end-Jun, about 2x more than the level at end-FY21. We estimate this roughly equals to 19% of the current share price. 
New project momentum looks healthy and the market seems to have underestimated FY22 earnings. Its 8x and 7.5x PERs for FY22 and FY23 are clearly attractive. 


Kunlun Energy (135 HK): An Excellent Show

<ul>
<li>Core earnings growth of 14.6% YoY at <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 very exciting. Gas sales gross profit was down 5% while integrated energy looks better with 51.2% growth.</li>
<li>Management guidance of 12-15% growth in FY22 seems to be optimistic, especially in a period of time where high input cost is likely to eat into margin still.</li>
<li>Valuations are not too stretched, yet not very appealing. Its net debt position also does not compare well with <a href="https://www.smartkarma.com/entities/china-resources-gas-group-ltd" target="_blank" data-smartkarma-citation="entities:20525:1" rel="noopener">CR Gas (1193 HK)</a> and <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>. </li>
</ul>


Core earnings growth of 14.6% YoY at ENN Energy (2688 HK) is not very exciting. Gas sales gross profit was down 5% while integrated energy looks better with 51.2% growth.
Management guidance of 12-15% growth in FY22 seems to be optimistic, especially in a period of time where high input cost is likely to eat into margin still.
Valuations are not too stretched, yet not very appealing. Its net debt position also does not compare well with CR Gas (1193 HK) and Kunlun Energy (135 HK). 


ENN Energy (2688 HK): Mediocre FY21, Management Update Not Exciting

<ul>
<li>The NPC and CPPCC will likely to cover more on the future of China's energy security and potential development of a national master plan for the hydrogen energy industry chain. </li>
<li>The latest announcement of the 14th 5-year hydrogen energy Plan in Inner Mongolia is another important mark for the industry, with the province's end-2025 industry value set at Rmb100bn.  </li>
<li>We expect more opportunities after the "Two Meetings" for key players including <a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">Cimc Enric (3899 HK)</a>, <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a> and <a href="https://www.smartkarma.com/entities/weichai-power-co-ltd-h" target="_blank" data-smartkarma-citation="entities:12508:1" rel="noopener">Weichai Power H (2338 HK)</a> to benefit. </li>
</ul>


The NPC and CPPCC will likely to cover more on the future of China's energy security and potential development of a national master plan for the hydrogen energy industry chain. 
The latest announcement of the 14th 5-year hydrogen energy Plan in Inner Mongolia is another important mark for the industry, with the province's end-2025 industry value set at Rmb100bn.  
We expect more opportunities after the "Two Meetings" for key players including Cimc Enric (3899 HK), Dongfang Electric (1072 HK) and Weichai Power H (2338 HK) to benefit. 


China's Hydrogen Economy: NPC and CPPCC to Give a Boost?

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)

China Gas Utilities: Dark Horses?

China's gas utilities sector's industry fundamentals are improving. Gas price pass-through mechanism to benefit profitability. Room for share...

Osbert Tang, CFA

Kunlun Energy (135 HK): Delivering Resilience

Kunlun's FY23 core earnings drop is distorted by oilfield project expiry, but other segments perform well. FY24 outlook is positive with more city...

Osbert Tang, CFA

Kunlun Energy (135 HK): An Excellent Show

Impressive 1H22 result is a clear demonstration of Kunlun's operational strengths and cash generating ability. The market should ease concerns on...

Osbert Tang, CFA

ENN Energy (2688 HK): Mediocre FY21, Management Update Not Exciting

ENN Energy's FY21 result is not particularly encouraging and we also found management's update on the post-result call not very exciting....

Osbert Tang, CFA

China's Hydrogen Economy: NPC and CPPCC to Give a Boost?

The "Two Meetings" will potentially give more clearance of central government's support for hydrgoen energy development in China. A detailed top...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

China Gas Utilities: Dark Horses?

​China's gas utilities sector's industry fundamentals are improving. Gas price pass-through mechanism to benefit profitability. Room for share...

Osbert Tang, CFA

Kunlun Energy (135 HK): Delivering Resilience

​Kunlun's FY23 core earnings drop is distorted by oilfield project expiry, but other segments perform well. FY24 outlook is positive with more city...

Osbert Tang, CFA

Kunlun Energy (135 HK): An Excellent Show

Impressive 1H22 result is a clear demonstration of Kunlun's operational strengths and cash generating ability. The market should ease concerns on...

Osbert Tang, CFA

ENN Energy (2688 HK): Mediocre FY21, Management Update Not Exciting

ENN Energy's FY21 result is not particularly encouraging and we also found management's update on the post-result call not very exciting....

Osbert Tang, CFA

China's Hydrogen Economy: NPC and CPPCC to Give a Boost?

The "Two Meetings" will potentially give more clearance of central government's support for hydrgoen energy development in China. A detailed top...

Osbert Tang, CFA

China's gas utilities sector's industry fundamentals are improving. Gas price pass-through mechanism to benefit profitability. Room for share...

Kunlun's FY23 core earnings drop is distorted by oilfield project expiry, but other segments perform well. FY24 outlook is positive with more city...