HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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.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.

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?

<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

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 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)

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

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

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

Despite a slow growth in 1H, financial position and dollar margin have both improved; and it issues encouraging full-year guidances. As a laggard...

Osbert Tang, CFA

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

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&P segment. The swing from...

Osbert Tang, CFA

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