HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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.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) 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

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.There are 5 main proposals in the consultation paper:<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>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.

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

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.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.

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

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With industrial and commercial gas sales yet to fully recover from the negative impact of Covid-19 and lower contribution from connection fees, <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> registered a core profit growth of just 5.5% YoY for 1H FY20/21. Without the impact of Rmb appreciation, this would have grown by 7.8%. An interim DPS of HK$0.10 is declared, same as a year ago. 
Despite a slowing 1H, China Gas introduced its guidance for a 15-20% YoY growth in full-year core profit, suggesting a significant pick-up in 2H. Management expects this to be generated from accelerated gas volume recovery, YoY expansion in dollar margin, good progress on Smart MicroGrid and improving cash flow. The stock now trades on undemanding 3.1x P/B and 12.2x PER for 12-month forward. With our top pick <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> rallied by 40.6% since end-Mar, compared with 5.1% for China Gas and 23.9% for the overall sector, we see room for China Gas to catch up during this winter gas peak season. 
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With industrial and commercial gas sales yet to fully recover from the negative impact of Covid-19 and lower contribution from connection fees, China Gas Holdings (384 HK) registered a core profit growth of just 5.5% YoY for 1H FY20/21. Without the impact of Rmb appreciation, this would have grown by 7.8%. An interim DPS of HK$0.10 is declared, same as a year ago. 
Despite a slowing 1H, China Gas introduced its guidance for a 15-20% YoY growth in full-year core profit, suggesting a significant pick-up in 2H. Management expects this to be generated from accelerated gas volume recovery, YoY expansion in dollar margin, good progress on Smart MicroGrid and improving cash flow. The stock now trades on undemanding 3.1x P/B and 12.2x PER for 12-month forward. With our top pick ENN Energy (2688 HK) rallied by 40.6% since end-Mar, compared with 5.1% for China Gas and 23.9% for the overall sector, we see room for China Gas to catch up during this winter gas peak season. 


China Gas Holdings (384 HK): Slower 1H Growth but Positive Guidance from Post-Result Call

We believe the 18.5% drop in core profit in 1H20 for <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> is largely a result of the loss at the E&amp;P segment.  The swing from profit to loss at E&amp;P amounted to Rmb830m, well accounted for the Rmb780m reduction in 1H20 reported profit. While the other segments are mostly weaker YoY, the magnitude is generally manageable (except LNG processing and terminal). At the same time, the contraction in dollar margin is disappointing.In our view, the weak result is within expectation. We expect sequential improvement in 2H20, as higher oil price reduces E&amp;P loss, gas sales growth stays solid, dollar margin improves slightly and LNG gasification volume rebounds. Meanwhile, we think the near-term catalyst will be the progress of its sale of pipeline to PipeChina, and the potential special dividend as resulted. At 0.95x 12-month forward P/B multiple, which is 1 SD below the average since 2016, we view Kunlun's valuation as inexpensive. We put Kunlun at HK$9.00 per share based on sum-of-the-parts valuation.

We believe the 18.5% drop in core profit in 1H20 for Kunlun Energy (135 HK) is largely a result of the loss at the E&amp;P segment.  The swing from profit to loss at E&amp;P amounted to Rmb830m, well accounted for the Rmb780m reduction in 1H20 reported profit. While the other segments are mostly weaker YoY, the magnitude is generally manageable (except LNG processing and terminal). At the same time, the contraction in dollar margin is disappointing.In our view, the weak result is within expectation. We expect sequential improvement in 2H20, as higher oil price reduces E&amp;P loss, gas sales growth stays solid, dollar margin improves slightly and LNG gasification volume rebounds. Meanwhile, we think the near-term catalyst will be the progress of its sale of pipeline to PipeChina, and the potential special dividend as resulted. At 0.95x 12-month forward P/B multiple, which is 1 SD below the average since 2016, we view Kunlun's valuation as inexpensive. We put Kunlun at HK$9.00 per share based on sum-of-the-parts valuation.

Kunlun Energy (135 HK): Weak 1H20 Expected, Near Term Focus on Pipeline Disposal

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)

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