HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>
<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> has suspended trading. The possibilities include privatisation, third-party offer, increase in stake by <a href="https://www.smartkarma.com/entities/enn-natural-gas-co-ltd" target="_blank" data-smartkarma-citation="entities:16456:1" rel="noopener">ENN Natural Gas (600803 CH)</a>, and a change in control. </li>
<li>It trades on 1.16x 12-month forward P/B, vs. 5-year average of 2.42x and 1.31x since 2024. Given the lower forward ROE, it is difficult to return to the 5-year average.</li>
<li>For PER, it should be higher than <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> but lower than <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>. At 10.8x (average of the two), it equates to HK$74.26.  </li>
</ul>



ENN Energy (2688 HK) has suspended trading. The possibilities include privatisation, third-party offer, increase in stake by ENN Natural Gas (600803 CH), and a change in control. 
It trades on 1.16x 12-month forward P/B, vs. 5-year average of 2.42x and 1.31x since 2024. Given the lower forward ROE, it is difficult to return to the 5-year average.
For PER, it should be higher than China Gas Holdings (384 HK) but lower than CR Gas (1193 HK). At 10.8x (average of the two), it equates to HK$74.26.  


ENN Energy (2688 HK): Privatisation or What? A Look at the Valuations

<ul>
<li>Core earnings 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> rose 25.2% in FY22, providing solid evidence for its strength against peers. We are delighted to see dollar margin even expanded 4.1%.</li>
<li>Pace of new project addition has not weakened as it secured 25 new projects in FY22. Collectively, they will increase sales volume by 3.2bn cu.m., 7% of FY22 volume.</li>
<li>Net cash of Rmb13.6bn equals 28% of share price, making 8.9% ROE look decent. Market earnings forecast is too low; and even so, it trades on just 7.2x FY23 PER.</li>
</ul>


Core earnings of Kunlun Energy (135 HK) rose 25.2% in FY22, providing solid evidence for its strength against peers. We are delighted to see dollar margin even expanded 4.1%.
Pace of new project addition has not weakened as it secured 25 new projects in FY22. Collectively, they will increase sales volume by 3.2bn cu.m., 7% of FY22 volume.
Net cash of Rmb13.6bn equals 28% of share price, making 8.9% ROE look decent. Market earnings forecast is too low; and even so, it trades on just 7.2x FY23 PER.


Kunlun Energy (135 HK): Rock Solid as Usual

<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> posted a healthy 2.6% earnings growth for 1H24. If not for the expiry of two oilfields last year, its earnings growth would have reached 6.8%. </li>
<li>Natural gas sales pre-tax margin contracted 0.5pp YoY, but has recovered significantly HoH. Other businesses have all seen good margin expansion. </li>
<li>The company has further accumulated net cash which increased 8.3% in the last six months. At HK$2.76/share, this equals 35% of the share price.</li>
</ul>



Kunlun Energy (135 HK) posted a healthy 2.6% earnings growth for 1H24. If not for the expiry of two oilfields last year, its earnings growth would have reached 6.8%. 
Natural gas sales pre-tax margin contracted 0.5pp YoY, but has recovered significantly HoH. Other businesses have all seen good margin expansion. 
The company has further accumulated net cash which increased 8.3% in the last six months. At HK$2.76/share, this equals 35% of the share price.


Kunlun Energy (135 HK): The Most Solid Play

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.


<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

Hong Kong

China Resources Gas Group Ltd distributes natural gas and petroleum gas in the cities of Chengdu, Fuyang, Huaibei, Linhai, Suzhou and Wuxi in the PRC. The Company also operates compressed natural gas filling stations in Chengdu, Nanjing and Wuxi. The group also is involved in bottled liquefied petroleum gas distribution in cities of Fuyang, Suzhou and Wuxi.

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CR Gas (1193 HK)

ENN Energy (2688 HK): Privatisation or What? A Look at the Valuations

Possibilities for ENN Energy including privatisation, third-party offer, stake increase by parent, and change in control. A price of at least...

Osbert Tang, CFA

Kunlun Energy (135 HK): Rock Solid as Usual

Kunlun's core profit growth is decent and, more importantly, demonstrated the resilience of dollar margin. New project flow is encouraging and we...

Osbert Tang, CFA

Kunlun Energy (135 HK): The Most Solid Play

Kunlun Energy reports 2.6% profit growth in 1H24. Natural gas sales margin contracted YoY but recovered HoH, while other businesses saw margin...

Osbert Tang, CFA

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

ENN Energy (2688 HK): Privatisation or What? A Look at the Valuations

​Possibilities for ENN Energy including privatisation, third-party offer, stake increase by parent, and change in control. A price of at least...

Osbert Tang, CFA

Kunlun Energy (135 HK): Rock Solid as Usual

Kunlun's core profit growth is decent and, more importantly, demonstrated the resilience of dollar margin. New project flow is encouraging and we...

Osbert Tang, CFA

Kunlun Energy (135 HK): The Most Solid Play

​Kunlun Energy reports 2.6% profit growth in 1H24. Natural gas sales margin contracted YoY but recovered HoH, while other businesses saw margin...

Osbert Tang, CFA

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

Possibilities for ENN Energy including privatisation, third-party offer, stake increase by parent, and change in control. A price of at least...

Kunlun Energy reports 2.6% profit growth in 1H24. Natural gas sales margin contracted YoY but recovered HoH, while other businesses saw margin...

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...