Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

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<p>This week in StubWorld ...</p>
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<p><a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> plumbs a new discount to NAV low after <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a>'s meteoric post-placement gain; <a href="https://www.smartkarma.com/entities/pccw-ltd" target="_blank" data-smartkarma-citation="entities:873:1" rel="noopener">PCCW Ltd (8 HK)</a> discount to NAV retraces, as expected; and <a href="https://www.smartkarma.com/entities/lg-corp" target="_blank" data-smartkarma-citation="entities:6653:1" rel="noopener">LG Corp (003550 KS)</a> still look cheap versus its sum of parts.</p>
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<p>Preceding my comments on these holdcos are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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This week in StubWorld ...

Evergrande Real Estate Group (3333 HK) plumbs a new discount to NAV low after Evergrande Auto (708 HK)'s meteoric post-placement gain; PCCW Ltd (8 HK) discount to NAV retraces, as expected; and LG Corp (003550 KS) still look cheap versus its sum of parts.




Preceding my comments on these holdcos are the weekly setup/unwind tables for Asia-Pacific Holdcos.


These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.


StubWorld: Evergrande Auto, PCCW, LG Corp

HK/China Equity Long-Short

Osbert Tang, CFA

<p>We think <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> will become an attractive gas utilities company after it completed the transaction to dispose of its Beijing Pipeline and Dalian LNG. By then, we see over 70% of its earnings will derive from natural gas sales business, a profile that compares well with its peers in the gas utilities sector.</p><p>In valuation terms, the new Kunlun will trade on just 10.5x PER for FY22F, well below 14x for its peers. While its ROE is lower than peers, this is due to its huge cash on hand even after the distribution of special dividends. Its FY22F P/B of 0.64x (on ex-special dividend basis) appears undemanding, especially given that, before making any investment in natural gas end-user sales business with the proceeds as planned, net cash (after special dividend) will still amount to 57% of the share price. </p>

We think Kunlun Energy (135 HK) will become an attractive gas utilities company after it completed the transaction to dispose of its Beijing Pipeline and Dalian LNG. By then, we see over 70% of its earnings will derive from natural gas sales business, a profile that compares well with its peers in the gas utilities sector.In valuation terms, the new Kunlun will trade on just 10.5x PER for FY22F, well below 14x for its peers. While its ROE is lower than peers, this is due to its huge cash on hand even after the distribution of special dividends. Its FY22F P/B of 0.64x (on ex-special dividend basis) appears undemanding, especially given that, before making any investment in natural gas end-user sales business with the proceeds as planned, net cash (after special dividend) will still amount to 57% of the share price. 

Kunlun Energy (135 HK): How Will the New Kunlun Look Like?

<p><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> finally concluded the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to PipeChina at a very favourable 1.9x P/B multiple. This is significantly better than 1.21x and 1.43x that <a href="https://www.smartkarma.com/entities/petrochina-co-ltd-h" target="_blank" data-smartkarma-citation="entities:262:1" rel="noopener">Petrochina Co Ltd H (857 HK)</a> and <a href="https://www.smartkarma.com/entities/china-petroleum-chemical-h" target="_blank" data-smartkarma-citation="entities:369:1" rel="noopener">China Petroleum &amp; Chemical (386 HK)</a> got from their deals with PipeChina, respectively.</p><p>With net cash inflow of Rmb37bn, or HK$4.94/share (ie 77% of current share price), Kunlun intends to pay out 50% of such cash. That said, the overall dividend yield for FY21F will reach 40.5%. After the transaction, based on sum-of-the-parts valuation, we place Kunlun at HK$10.58, meaning that it trades on a steep 39% discount. We believe Kunlun will escalate its expansion into the downstream gas sales business going forward, and this should narrow its valuation discount to gas utilities peers. </p>

Kunlun Energy (135 HK) finally concluded the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to PipeChina at a very favourable 1.9x P/B multiple. This is significantly better than 1.21x and 1.43x that Petrochina Co Ltd H (857 HK) and China Petroleum &amp; Chemical (386 HK) got from their deals with PipeChina, respectively.With net cash inflow of Rmb37bn, or HK$4.94/share (ie 77% of current share price), Kunlun intends to pay out 50% of such cash. That said, the overall dividend yield for FY21F will reach 40.5%. After the transaction, based on sum-of-the-parts valuation, we place Kunlun at HK$10.58, meaning that it trades on a steep 39% discount. We believe Kunlun will escalate its expansion into the downstream gas sales business going forward, and this should narrow its valuation discount to gas utilities peers. 

Kunlun Energy (135 HK): Very Favourable Valuation for Pipeline and Dalian LNG Disposals

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>At long last, Hang Seng Indexes (HSIL) has released the consultation paper on the "Proposal to enhance the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market". Market participants have until 24 January to submit their views to the HSIL.</p><p>There are 5 main proposals in the consultation paper:</p><ol>
<li>Select constituents by industry group based on a target coverage for each industry group</li>
<li>Increase the number of constituents to between 65 to 80</li>
<li>Removal of the Minimum Listing History requirement for eligible candidates</li>
<li>Maintain a certain number of constituents classified as Hong Kong companies to sustain the level of representation of Hong Kong portion in the index</li>
<li>Lower the weighting cap of individual constituents from 10% to 8%, and increase the weighting cap of WVRs and Secondary Listings from 5% to 8%.</li>
</ol><p>The simulated one-way turnover of increasing the number of constituents to between 65-80 is estimated at 15-20% and HSIL proposes to implement the transition to the enhanced methodology within one year.</p><p>In this Insight, we look at the impact on the index from the proposed changes.</p>

At long last, Hang Seng Indexes (HSIL) has released the consultation paper on the "Proposal to enhance the Hong Kong Hang Seng Index (HSI INDEX) as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market". Market participants have until 24 January to submit their views to the HSIL.There are 5 main proposals in the consultation paper:
Select constituents by industry group based on a target coverage for each industry group
Increase the number of constituents to between 65 to 80
Removal of the Minimum Listing History requirement for eligible candidates
Maintain a certain number of constituents classified as Hong Kong companies to sustain the level of representation of Hong Kong portion in the index
Lower the weighting cap of individual constituents from 10% to 8%, and increase the weighting cap of WVRs and Secondary Listings from 5% to 8%.
The simulated one-way turnover of increasing the number of constituents to between 65-80 is estimated at 15-20% and HSIL proposes to implement the transition to the enhanced methodology within one year.In this Insight, we look at the impact on the index from the proposed changes.

HSI Market Consultation - Wide Ranging Changes Proposed

<p>We expect <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> to experience a re-rating on the back of its efforts of strengthening its presence in the downstream gas distribution market. Kunlun Gas, its gas sales subsidiary, achieved a 30.6% YoY growth in 3Q20 profit, suggesting a powerful recovery from the negative impact of Covid-19 in 1H20. Gross margin in 3Q20 is also the highest in the last six quarters.</p><p>The recent acquisition of 10 city gas projects in Xinjiang has added to its portfolio and will boost Kunlun Gas' profit by 4-5%. Kunlun Energy's share price was still down 8.8% YTD, despite a 107% rebound from trough, and the stock now trades on 0.89x P/B (1SD below average), which is undemanding both relative to industry peers and historical range. </p>

We expect Kunlun Energy (135 HK) to experience a re-rating on the back of its efforts of strengthening its presence in the downstream gas distribution market. Kunlun Gas, its gas sales subsidiary, achieved a 30.6% YoY growth in 3Q20 profit, suggesting a powerful recovery from the negative impact of Covid-19 in 1H20. Gross margin in 3Q20 is also the highest in the last six quarters.The recent acquisition of 10 city gas projects in Xinjiang has added to its portfolio and will boost Kunlun Gas' profit by 4-5%. Kunlun Energy's share price was still down 8.8% YTD, despite a 107% rebound from trough, and the stock now trades on 0.89x P/B (1SD below average), which is undemanding both relative to industry peers and historical range. 

Kunlun Energy (135 HK): Kunlun Gas to Lead Re-Rating

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)

StubWorld: Evergrande Auto, PCCW, LG Corp

Chine Evergrande (3333 HK) looks "cheap" and Evergrande Auto (708 HK) frothy, suggesting a set-up here. Personally, I would avoid both.

David Blennerhassett

Kunlun Energy (135 HK): How Will the New Kunlun Look Like?

Kunlun will become a cheap and quality gas utility after completion of Beijing Pipeline and Dalian LNG disposal. This Insight looks at its FY22...

Osbert Tang, CFA

Kunlun Energy (135 HK): Very Favourable Valuation for Pipeline and Dalian LNG Disposals

Kunlun secured a very good deal of 1.9x P/B for the disposal of its interest in Beijing pipeline and Dalian LNG. It will payout 50% of proceeds at...

Osbert Tang, CFA

HSI Market Consultation - Wide Ranging Changes Proposed

HSIL has announced the market consultation for the Hang Seng Index. The conclusions should be announced in February. If the market agrees to most...

Brian Freitas

Kunlun Energy (135 HK): Kunlun Gas to Lead Re-Rating

Impressive performance at Kunlun Gas should serve as a driver for the re-rating of Kunlun Energy. More downstream acquisitions are the key...

Osbert Tang, CFA

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