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Morningstar, Inc.

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Thematic (Sector/Industry)

We believe the recent cut of CNY 0.10 per cubic meter in the city-gate price effective Sept. 1 for non-residential users is a positive development for China’s city gas distributors and is in line with our expectation that government policies will remain favorable to promote the use of natural gas. Although we do not expect an improvement in dollar margin in the long term as the savings in feedstock costs will be gradually passed through to consumers, we think the lower natural gas prices will continue to encourage consumption growth. We have already factored in more than 15% CAGR for natural gas sales volume for city gas operators under our coverage for the next five years.At current share prices, our preferred pick is <a href="https://www.smartkarma.com/entities/316" target="_blank" data-smartkarma-citation="entities:316:1">ENN Energy Holdings Ltd (2688 HK)</a> given the attractive valuation, while we think <a href="https://www.smartkarma.com/entities/20525" target="_blank" data-smartkarma-citation="entities:20525:1">China Resources Gas Group Ltd (1193 HK)</a> is fairly valued. On the other hand, we believe <a href="https://www.smartkarma.com/entities/14315" target="_blank" data-smartkarma-citation="entities:14315:1">China Gas Holdings Ltd (384 HK)</a> is overvalued as the market has baked in aggressive growth assumptions, leaving little room for disappointment.The latest city-gate price cut by the National Development and Reform Commission has taken into account the lower transmission tariffs (average reduction of 15%) for midstream pipelines effective on Sept. 1 and a reduction in the value-added tax for natural gas to 11% from 13% since July 1. Despite the cut in transmission tariffs, we think midstream pipeline owners such as <a href="https://www.smartkarma.com/entities/262" target="_blank" data-smartkarma-citation="entities:262:1">Petrochina Co Ltd H (857 HK)</a> and <a href="https://www.smartkarma.com/entities/369" target="_blank" data-smartkarma-citation="entities:369:1">China Petroleum &amp; Chemical Corp (386 HK)</a> remain fairly valued as the announced cut is milder than market expectation and this also removes overhanging uncertainty on both companies. In addition, the flexibility to raise the city-gate price during winter will help to mitigate earnings impact.Analyst: Chokwai Lee, CFA

We believe the recent cut of CNY 0.10 per cubic meter in the city-gate price effective Sept. 1 for non-residential users is a positive development for China’s city gas distributors and is in line with our expectation that government policies will remain favorable to promote the use of natural gas. Although we do not expect an improvement in dollar margin in the long term as the savings in feedstock costs will be gradually passed through to consumers, we think the lower natural gas prices will continue to encourage consumption growth. We have already factored in more than 15% CAGR for natural gas sales volume for city gas operators under our coverage for the next five years.At current share prices, our preferred pick is ENN Energy Holdings Ltd (2688 HK) given the attractive valuation, while we think China Resources Gas Group Ltd (1193 HK) is fairly valued. On the other hand, we believe China Gas Holdings Ltd (384 HK) is overvalued as the market has baked in aggressive growth assumptions, leaving little room for disappointment.The latest city-gate price cut by the National Development and Reform Commission has taken into account the lower transmission tariffs (average reduction of 15%) for midstream pipelines effective on Sept. 1 and a reduction in the value-added tax for natural gas to 11% from 13% since July 1. Despite the cut in transmission tariffs, we think midstream pipeline owners such as Petrochina Co Ltd H (857 HK) and China Petroleum &amp; Chemical Corp (386 HK) remain fairly valued as the announced cut is milder than market expectation and this also removes overhanging uncertainty on both companies. In addition, the flexibility to raise the city-gate price during winter will help to mitigate earnings impact.Analyst: Chokwai Lee, CFA

City-Gate Price Cut Reaffirms Our Positive Outlook On Gas Distributors; Neutral On Midstream Players

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

Equity Bottom-Up

Narrow-moat China Resources Gas’, or CRG’s, 2016 net profit of CNY 3.29 billion was within our expectations, and we leave our earnings forecasts unchanged. Despite flat revenue, earnings rose 16% year over year, as a larger percentage cut in city-gate gas costs versus the tariff cut lifted the gross margin. After rolling forward our valuation model, we raise our fair value estimate to HKD 31.00 from HKD 27.50. We think CRG remains undervalued at the current price level.CRG benefited from a recovery in natural gas demand, with the 2016 natural gas sales volume rising 15% year over year. In particular, the commercial sector registered the fastest growth of 31%; meanwhile, similar to its peers, gas station sales volume was relatively weaker at 6% due to competition from electric vehicles and lower oil prices. Management is guiding sales volume growth of at least 15% for 2017, and volume growth for the first two months of 2017 was strong at 16% year over year. We believe the guidance is achievable, and in addition to rising commercial sector gas consumption, we expect increasing environmental protection policies in China to accelerate industrial demand on the back of intensifying “coal-to-gas” conversion.Meanwhile, CRG’s new residential connections of 2.7 million in 2016 exceeded our estimate of 2.5 million, thanks to the firm’s efforts to focus on old residential households and increasing affordable housing construction by the government. We believe the new residential connections will remain sustainable at the current pace, as CRG’s penetration rate at 46% as at year-end 2016 is one of the lowest among its peers. We also expect the connection gross margin to stay at 59.8% for the next five years.Analyst: Chokwai Lee

Narrow-moat China Resources Gas’, or CRG’s, 2016 net profit of CNY 3.29 billion was within our expectations, and we leave our earnings forecasts unchanged. Despite flat revenue, earnings rose 16% year over year, as a larger percentage cut in city-gate gas costs versus the tariff cut lifted the gross margin. After rolling forward our valuation model, we raise our fair value estimate to HKD 31.00 from HKD 27.50. We think CRG remains undervalued at the current price level.CRG benefited from a recovery in natural gas demand, with the 2016 natural gas sales volume rising 15% year over year. In particular, the commercial sector registered the fastest growth of 31%; meanwhile, similar to its peers, gas station sales volume was relatively weaker at 6% due to competition from electric vehicles and lower oil prices. Management is guiding sales volume growth of at least 15% for 2017, and volume growth for the first two months of 2017 was strong at 16% year over year. We believe the guidance is achievable, and in addition to rising commercial sector gas consumption, we expect increasing environmental protection policies in China to accelerate industrial demand on the back of intensifying “coal-to-gas” conversion.Meanwhile, CRG’s new residential connections of 2.7 million in 2016 exceeded our estimate of 2.5 million, thanks to the firm’s efforts to focus on old residential households and increasing affordable housing construction by the government. We believe the new residential connections will remain sustainable at the current pace, as CRG’s penetration rate at 46% as at year-end 2016 is one of the lowest among its peers. We also expect the connection gross margin to stay at 59.8% for the next five years.Analyst: Chokwai Lee

China Resources Gas' 2016 Results Underpinned by Robust Volume Growth; Shares Remain Undervalued

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 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)

City-Gate Price Cut Reaffirms Our Positive Outlook On Gas Distributors; Neutral On Midstream Players

We believe the recent cut of CNY 0.10 per cubic meter in the city-gate price effective Sept. 1 for non-residential users is a positive development...

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.

China Resources Gas' 2016 Results Underpinned by Robust Volume Growth; Shares Remain Undervalued

Narrow-moat China Resources Gas’, or CRG’s, 2016 net profit of CNY 3.29 billion was within our expectations, and we leave our earnings forecasts...

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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