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Morningstar

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Morningstar, Inc.

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Equity Bottom-Up

We think narrow-moat China Gas Holdings’, or CGH’s, share price should be boosted by its above-consensus fiscal 2017 results and upbeat near-term guidance. Nonetheless, long-term performance will still hinge on the allowed return on its city gas operations, on which the government has yet to decide. CGH’s fiscal 2017 net profit of CNY 4.15 billion was up 82.5% year over year on the back of stronger-than-expected operating figures and the absence of one-off losses incurred in fiscal 2016. We raise our earnings forecasts for fiscal 2018-19 by 16%-34% to factor in the positive developments. Consequently, our fair value estimate is increased to HKD 14.20 from HKD 11.70.Total natural gas sales volume excluding wholesale operations grew 16.2% year over year, mainly owing to strong demand growth of 24.9% from the residential segment. In addition, new residential connections of 2.6 million beat our forecast of 2.4 million. Management is guiding for more than 30% volume growth for retail segments in fiscal 2018 and more than 25% growth in fiscal 2019 and fiscal 2020. Furthermore, CGH is looking to add 3.5 million, 4.5 million, and 5.0 million of new residential connections for fiscal 2018, 2019, and 2020, respectively. Management attributed the strong growth potential to the replacement of coal with gas projects for winter heating in township-level regions of Northern China, and in the year to date, the firm has signed new agreements with 670,000 residential users. Besides, many local governments have announced plans to provide subsidies for coal-to-gas conversions. We are positive on such developments but we forecast more conservative average volume growth of about 20% for retail segments, as we envision possible delays in project execution in rural areas.Analyst: Chokwai Lee, CFA

We think narrow-moat China Gas Holdings’, or CGH’s, share price should be boosted by its above-consensus fiscal 2017 results and upbeat near-term guidance. Nonetheless, long-term performance will still hinge on the allowed return on its city gas operations, on which the government has yet to decide. CGH’s fiscal 2017 net profit of CNY 4.15 billion was up 82.5% year over year on the back of stronger-than-expected operating figures and the absence of one-off losses incurred in fiscal 2016. We raise our earnings forecasts for fiscal 2018-19 by 16%-34% to factor in the positive developments. Consequently, our fair value estimate is increased to HKD 14.20 from HKD 11.70.Total natural gas sales volume excluding wholesale operations grew 16.2% year over year, mainly owing to strong demand growth of 24.9% from the residential segment. In addition, new residential connections of 2.6 million beat our forecast of 2.4 million. Management is guiding for more than 30% volume growth for retail segments in fiscal 2018 and more than 25% growth in fiscal 2019 and fiscal 2020. Furthermore, CGH is looking to add 3.5 million, 4.5 million, and 5.0 million of new residential connections for fiscal 2018, 2019, and 2020, respectively. Management attributed the strong growth potential to the replacement of coal with gas projects for winter heating in township-level regions of Northern China, and in the year to date, the firm has signed new agreements with 670,000 residential users. Besides, many local governments have announced plans to provide subsidies for coal-to-gas conversions. We are positive on such developments but we forecast more conservative average volume growth of about 20% for retail segments, as we envision possible delays in project execution in rural areas.Analyst: Chokwai Lee, CFA

China Gas Holdings' Results Beat Expectation With Positive Guidance; Increasing FVE to HKD 14.20

Thematic (Sector/Industry)

The shares of China city gas distributors took a hit May 15 following news that the government may impose a 6% cap on the annual rate of return on assets for natural gas distributors in urban areas. The share prices of <a href="https://www.smartkarma.com/entities/14315" target="_blank" data-smartkarma-citation="entities:14315:1">China Gas Holdings Ltd (384 HK)</a> , <a href="https://www.smartkarma.com/entities/20525" target="_blank" data-smartkarma-citation="entities:20525:1">China Resources Gas Group Ltd (1193 HK)</a> , and <a href="https://www.smartkarma.com/entities/316" target="_blank" data-smartkarma-citation="entities:316:1">ENN Energy Holdings Ltd (2688 HK)</a> dropped more than 10% from May 12, but we think the sell-off is overdone. In our view, the key to assessing the impact of the return cap is whether the earnings from gas connection are included in the calculation of ROA. If earnings from connection fees are excluded, we believe the near-term impact could be muted for city gas operators, as most of their projects have ROA of less than 6%. However, details remain scant, and we only know that the 6% cap will be calculated on a posttax basis after deducting "reasonable costs."We think it is too early to quantify the impact of the proposal, as it is still in the drafting stage and a final version may only be decided in the next year. Nonetheless, because of the uncertainty, we believe upside for city gas operators’ share prices could be limited in the near term. We don’t see any impact on our narrow moat ratings for the companies so far, assuming the connection fees are not subject to the capped rate.Analyst: Chokwai Lee, CFA

The shares of China city gas distributors took a hit May 15 following news that the government may impose a 6% cap on the annual rate of return on assets for natural gas distributors in urban areas. The share prices of China Gas Holdings Ltd (384 HK) , China Resources Gas Group Ltd (1193 HK) , and ENN Energy Holdings Ltd (2688 HK) dropped more than 10% from May 12, but we think the sell-off is overdone. In our view, the key to assessing the impact of the return cap is whether the earnings from gas connection are included in the calculation of ROA. If earnings from connection fees are excluded, we believe the near-term impact could be muted for city gas operators, as most of their projects have ROA of less than 6%. However, details remain scant, and we only know that the 6% cap will be calculated on a posttax basis after deducting "reasonable costs."We think it is too early to quantify the impact of the proposal, as it is still in the drafting stage and a final version may only be decided in the next year. Nonetheless, because of the uncertainty, we believe upside for city gas operators’ share prices could be limited in the near term. We don’t see any impact on our narrow moat ratings for the companies so far, assuming the connection fees are not subject to the capped rate.Analyst: Chokwai Lee, CFA

Impact of Return Cap for China's City Gas Distributors Hinges on Connection Fee Treatment

HK/China small/mid-caps specialist

Pep So, CFA, CPA

<a href="https://www.smartkarma.com/entities/316" target="_blank" data-smartkarma-citation="entities:316:1">Energy Holdings Ltd (2688 HK)</a> (“ENN”) is the largest privately-owned gas distributor in China. Despite China’s determination to lower pollution levels by promoting the use of natural gas, ENN and other Chinese gas distributors experienced a year of underperformance in 2016 on the back of a series of negative industry regulations and stories. However, many of these concerns appear to be overdone and ENN’s long-term fundamentals remain rock solid:<ul><li>Strong financial track record and positive outlook: ENN has delivered strong financial performance during 2006-2015. It grew its revenue and profit every year and its revenue and profit CAGRs are 25% and 24% respectively over the period. The strong performance is expected to carry forward in 2016, as gas demand has picked up nicely since 2H16. Growth outlook stays positive as penetration rate remains low.</li><li>Underperformance overdone: As the government targets to boost natural gas consumption by making it more affordable, regulators have taken measures and looked at ways to reduce gas distributors’ tariffs and fees so that end-users can pay less. While many of them, if carried out, would hurt ENN’s margins, the overall impact on earnings is likely to be limited.</li><li>Cost leader in long run: ENN, as the only privately-owned sizable player, is committed to cost control. It has been active in lowering costs via streamlining organizational structure and reducing redundancy. On the other hand, thanks to its coastal presence, it has put through its plan to import cheaper fuels from overseas. The move should further put the company ahead of peers in terms of cost savings in long run.</li></ul>Now that ENN’s share price has almost halved from its peak level in 2014 and its valuation is currently at a multi-year low, long-term investors should seize the golden buying opportunity. ENN is a premium choice for “growth at a reasonable price” investment. We estimate ENN’s fair value to be HKD54.4 share, implying an upside of 52%.

Energy Holdings Ltd (2688 HK) (“ENN”) is the largest privately-owned gas distributor in China. Despite China’s determination to lower pollution levels by promoting the use of natural gas, ENN and other Chinese gas distributors experienced a year of underperformance in 2016 on the back of a series of negative industry regulations and stories. However, many of these concerns appear to be overdone and ENN’s long-term fundamentals remain rock solid:Strong financial track record and positive outlook: ENN has delivered strong financial performance during 2006-2015. It grew its revenue and profit every year and its revenue and profit CAGRs are 25% and 24% respectively over the period. The strong performance is expected to carry forward in 2016, as gas demand has picked up nicely since 2H16. Growth outlook stays positive as penetration rate remains low.Underperformance overdone: As the government targets to boost natural gas consumption by making it more affordable, regulators have taken measures and looked at ways to reduce gas distributors’ tariffs and fees so that end-users can pay less. While many of them, if carried out, would hurt ENN’s margins, the overall impact on earnings is likely to be limited.Cost leader in long run: ENN, as the only privately-owned sizable player, is committed to cost control. It has been active in lowering costs via streamlining organizational structure and reducing redundancy. On the other hand, thanks to its coastal presence, it has put through its plan to import cheaper fuels from overseas. The move should further put the company ahead of peers in terms of cost savings in long run.Now that ENN’s share price has almost halved from its peak level in 2014 and its valuation is currently at a multi-year low, long-term investors should seize the golden buying opportunity. ENN is a premium choice for “growth at a reasonable price” investment. We estimate ENN’s fair value to be HKD54.4 share, implying an upside of 52%. 

ENN Energy: Golden Long-Term Opportunity as Top Chinese Gas Distributor Valuation Hit Multi-Year Low

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Sino American Silicon Products / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/sino-american-silicon-products-inc" target="_blank" data-smartkarma-citation="entities:3441:1" rel="noopener">Sino American Silicon Products (5483 TT)</a>  is a Taiwan-based company mainly engaged in the research, development, design, manufacture, and distribution of semiconductor wafer products with subsidiaries in both listed and unlisted companies including <a href="https://www.smartkarma.com/entities/globalwafers-co-ltd" target="_blank" data-smartkarma-citation="entities:17916:1" rel="noopener">Globalwafers (6488 TT)</a> , <a href="https://www.smartkarma.com/entities/parade-technologies-ltd" target="_blank" data-smartkarma-citation="entities:6987:1" rel="noopener">Parade Technologies (4966 TT)</a> , <a href="https://www.smartkarma.com/entities/actron-technology-corp" target="_blank" data-smartkarma-citation="entities:4989:1" rel="noopener">Actron Technology (8255 TT)</a> and <a href="https://www.smartkarma.com/entities/advanced-wireless-semiconduc" target="_blank" data-smartkarma-citation="entities:16559:1" rel="noopener">Advanced Wireless Semiconduc (8086 TT)</a> with only in Globalwafers - SAS owns more than 51%.
The large discount between SAS and its subsidiaries could be due to 1) lack of bulge-bracket coverage, 2) higher polysilicon price 3) and 3) weak 1H demand from the solar and the semiconductor from COVID-19 plague which caused investors to care less about the value dislocation between SAS and its subsidiaries.
With a somewhat certain 28-30% gain in the earning as early Q1 2022, investors should start slowly building positions in SAS as the risk-off beast may disturb the confidence in the equity market much longer than what investors would like. The second scenario of increasing stake in Parade Tech should be treated as a call option as when it happens, it is a bonus of another 24%. Thus the total upside could be around 54%. 
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Besides the above-mentioned reasons, <a href="https://www.smartkarma.com/entities/sino-american-silicon-products-inc" target="_blank" data-smartkarma-citation="entities:3441:1" rel="noopener">Sino American Silicon Products (5483 TT)</a> remains a smart way to gain exposure in Globalwafers which trades at 24x PER, compared to SAS that trades at 13x PER. The other factor is that Globalwafers dividend yield is 2.28% while SAS is 5.22%. 
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Sino American Silicon Products (5483 TT)  is a Taiwan-based company mainly engaged in the research, development, design, manufacture, and distribution of semiconductor wafer products with subsidiaries in both listed and unlisted companies including Globalwafers (6488 TT) , Parade Technologies (4966 TT) , Actron Technology (8255 TT) and Advanced Wireless Semiconduc (8086 TT) with only in Globalwafers - SAS owns more than 51%.
The large discount between SAS and its subsidiaries could be due to 1) lack of bulge-bracket coverage, 2) higher polysilicon price 3) and 3) weak 1H demand from the solar and the semiconductor from COVID-19 plague which caused investors to care less about the value dislocation between SAS and its subsidiaries.
With a somewhat certain 28-30% gain in the earning as early Q1 2022, investors should start slowly building positions in SAS as the risk-off beast may disturb the confidence in the equity market much longer than what investors would like. The second scenario of increasing stake in Parade Tech should be treated as a call option as when it happens, it is a bonus of another 24%. Thus the total upside could be around 54%. 

Besides the above-mentioned reasons, Sino American Silicon Products (5483 TT) remains a smart way to gain exposure in Globalwafers which trades at 24x PER, compared to SAS that trades at 13x PER. The other factor is that Globalwafers dividend yield is 2.28% while SAS is 5.22%. 


Sino American Silicon (5483): Entry to Globalwafers and Others

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 Holdings' Results Beat Expectation With Positive Guidance; Increasing FVE to HKD 14.20

We think narrow-moat China Gas Holdings’, or CGH’s, share price should be boosted by its above-consensus fiscal 2017 results and upbeat near-term...

Morningstar, Inc.

Impact of Return Cap for China's City Gas Distributors Hinges on Connection Fee Treatment

The shares of China city gas distributors took a hit May 15 following news that the government may impose a 6% cap on the annual rate of return on...

Morningstar, Inc.

ENN Energy: Golden Long-Term Opportunity as Top Chinese Gas Distributor Valuation Hit Multi-Year Low

Energy Holdings Ltd (2688 HK) (“ENN”) is the largest privately-owned gas distributor in China. Despite China’s determination to lower pollution...

Pep So, CFA, CPA

Sino American Silicon (5483): Entry to Globalwafers and Others

Sino American Silicon remains a smart way to gain exposure in Globalwafers (24x PER), compared to SAS (13x PER). The other factor is that...

Henry Soediarko

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