HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>With an 18.6% growth in 1H22 profit from continuing operations, <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> has not disappointed us. Natural gas sales segment is a bright spot with solid growth.</li>
<li>Net cash swelled to Rmb10.2bn at end-Jun, about 2x more than the level at end-FY21. We estimate this roughly equals to 19% of the current share price. </li>
<li>New project momentum looks healthy and the market seems to have underestimated FY22 earnings. Its 8x and 7.5x PERs for FY22 and FY23 are clearly attractive. </li>
</ul>


With an 18.6% growth in 1H22 profit from continuing operations, Kunlun Energy (135 HK) has not disappointed us. Natural gas sales segment is a bright spot with solid growth.
Net cash swelled to Rmb10.2bn at end-Jun, about 2x more than the level at end-FY21. We estimate this roughly equals to 19% of the current share price. 
New project momentum looks healthy and the market seems to have underestimated FY22 earnings. Its 8x and 7.5x PERs for FY22 and FY23 are clearly attractive. 


Kunlun Energy (135 HK): An Excellent Show

<ul>
<li>Core earnings growth of 14.6% YoY at <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> is not very exciting. Gas sales gross profit was down 5% while integrated energy looks better with 51.2% growth.</li>
<li>Management guidance of 12-15% growth in FY22 seems to be optimistic, especially in a period of time where high input cost is likely to eat into margin still.</li>
<li>Valuations are not too stretched, yet not very appealing. Its net debt position also does not compare well with <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/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a>. </li>
</ul>


Core earnings growth of 14.6% YoY at ENN Energy (2688 HK) is not very exciting. Gas sales gross profit was down 5% while integrated energy looks better with 51.2% growth.
Management guidance of 12-15% growth in FY22 seems to be optimistic, especially in a period of time where high input cost is likely to eat into margin still.
Valuations are not too stretched, yet not very appealing. Its net debt position also does not compare well with CR Gas (1193 HK) and Kunlun Energy (135 HK). 


ENN Energy (2688 HK): Mediocre FY21, Management Update Not Exciting

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>The last time I wrote about <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> was in early June 2021 when I discussed the little extra trick one might use to maximise dividend payout. It worked. But I was bullish.</p><p>At that time, my conclusion was...</p><blockquote><p>I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, a dollar-neutral position is probably appropriate. </p></blockquote><p>The stock was a little wishy-washy the day the Special Dividend went ex- - for whatever reason I do not know - then rallied sharply but since 4 June, though the stock itself rallied 30% from that post ex-div rally to early September, the sharp rise in gas input costs caused the shares to fall back to their post-div rally point last week. However the stock has continued to outperform peers - outperforming a basket of three liquid HK-listed city gas peers by 37.9% since I last wrote (the dots). </p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/237/339/original/Screenshot+2021-10-25+at+6.55.32+PM.png?1635159349" class="editor-image img-responsive" data-smartkarma-image-id="237339"></figure></section><p>But despite that performance... </p></section><p>I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, EITHER a dollar-neutral position OR an outright long is appropriate. </p><p>More below the fold. </p>

The last time I wrote about Kunlun Energy (135 HK) was in early June 2021 when I discussed the little extra trick one might use to maximise dividend payout. It worked. But I was bullish.At that time, my conclusion was...I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, a dollar-neutral position is probably appropriate. The stock was a little wishy-washy the day the Special Dividend went ex- - for whatever reason I do not know - then rallied sharply but since 4 June, though the stock itself rallied 30% from that post ex-div rally to early September, the sharp rise in gas input costs caused the shares to fall back to their post-div rally point last week. However the stock has continued to outperform peers - outperforming a basket of three liquid HK-listed city gas peers by 37.9% since I last wrote (the dots). But despite that performance... I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, EITHER a dollar-neutral position OR an outright long is appropriate. More below the fold. 

Kunlun Energy - People Still Don't Get It So Gas It Up Some More

<p>We touched base with <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 seek answers on five questions that we think are of significant interests to investors. These include topics on the impact of the rally in LNG price, mechanism for retail gas price adjustment, outlook for dollar margin, impact on the terminal and processing segment, gas volume availability and the future of the E&amp;P segment. These questions are all well answered by Kunlun's management.</p><p>Overall, based on our discussions, the impact of higher LNG price on Kunlun's profitability and dollar margin should be manageable. It has secured enough gas sources and there should not be worries on shortage. We also anticipate the earnings volatility caused by the upstream E&amp;P business will be sharply lower in two to three years' time; and with better earnings stability and quality, Kunlun should continue to see re-rating.</p>

We touched base with Kunlun Energy (135 HK) to seek answers on five questions that we think are of significant interests to investors. These include topics on the impact of the rally in LNG price, mechanism for retail gas price adjustment, outlook for dollar margin, impact on the terminal and processing segment, gas volume availability and the future of the E&amp;P segment. These questions are all well answered by Kunlun's management.Overall, based on our discussions, the impact of higher LNG price on Kunlun's profitability and dollar margin should be manageable. It has secured enough gas sources and there should not be worries on shortage. We also anticipate the earnings volatility caused by the upstream E&amp;P business will be sharply lower in two to three years' time; and with better earnings stability and quality, Kunlun should continue to see re-rating.

Kunlun Energy (135 HK): Five Questions to Management Get Answered

David Blennerhassett

<div>
<p>Following a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0816/2021081600024.pdf" target="_blank" rel="noopener">suspension</a> in trading on the morning of the 16 August "<em>pursuant to The Hong Kong Code on Takeovers and Mergers</em> ", piped natural gas operator <a href="https://www.smartkarma.com/entities/suchuang-gas-corp-ltd" target="_blank" data-smartkarma-citation="entities:304:1" rel="noopener">Suchuang Gas Corp (1430 HK)</a> has announced a privatisation <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0825/2021082501197.pdf" target="_blank" rel="noopener">Offer</a> by way of a Scheme from a wholly-owned subsidiary of <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>.</p>
</div>
<div>
<p>CR Gas is offering HK$2.50/share, a 2.88% premium to last close - or given the pre-announcement pop, a 23.15% premium to the average closing price for the 10 days to the last day of trading. Suchuang shareholders are afforded the option of exchanging their shares on a one-for-one basis into Holdco.</p>
<p>No dividends are expected to be paid during the Offer period. </p>
<p>Irrevocables totaling 74.75% have been received from the Controlling Shareholders inter alia. This is somewhat misleading as some of these shares are held by Fung Yu (23.76%) and Total Honest (13.64%) - vehicles ultimately controlled by ex-EDs Su Aping and his wife Zhu Yaying - are in concert with the Offeror, and are therefore required to abstain from voting at the Scheme Meeting. </p>
<p>Disinterested Shareholders total 62.6% of shares out.</p>
</div>
<div>
<p>The headcount test applies as Suchuang is Cayman incorporated.</p>
<p>Regulatory approvals include SASAC.</p>
</div>
<div>
<p>This looks done.</p>
</div>
<div>
<p>More below the fold.</p>
</div>


Following a suspension in trading on the morning of the 16 August "pursuant to The Hong Kong Code on Takeovers and Mergers ", piped natural gas operator Suchuang Gas Corp (1430 HK) has announced a privatisation Offer by way of a Scheme from a wholly-owned subsidiary of CR Gas (1193 HK).


CR Gas is offering HK$2.50/share, a 2.88% premium to last close - or given the pre-announcement pop, a 23.15% premium to the average closing price for the 10 days to the last day of trading. Suchuang shareholders are afforded the option of exchanging their shares on a one-for-one basis into Holdco.
No dividends are expected to be paid during the Offer period. 
Irrevocables totaling 74.75% have been received from the Controlling Shareholders inter alia. This is somewhat misleading as some of these shares are held by Fung Yu (23.76%) and Total Honest (13.64%) - vehicles ultimately controlled by ex-EDs Su Aping and his wife Zhu Yaying - are in concert with the Offeror, and are therefore required to abstain from voting at the Scheme Meeting. 
Disinterested Shareholders total 62.6% of shares out.


The headcount test applies as Suchuang is Cayman incorporated.
Regulatory approvals include SASAC.


This looks done.


More below the fold.


Suchuang Gas (1430 HK): Delisting Proposal From CR Gas

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): An Excellent Show

Impressive 1H22 result is a clear demonstration of Kunlun's operational strengths and cash generating ability. The market should ease concerns on...

Osbert Tang, CFA

ENN Energy (2688 HK): Mediocre FY21, Management Update Not Exciting

ENN Energy's FY21 result is not particularly encouraging and we also found management's update on the post-result call not very exciting....

Osbert Tang, CFA

Kunlun Energy - People Still Don't Get It So Gas It Up Some More

There are a few ways to look at Kunlun Energy vs Peers. Traditional measures show Kunlun as dreadfully cheap vs peers. The traditional measures are...

Travis Lundy

Kunlun Energy (135 HK): Five Questions to Management Get Answered

The impact of higher LNG price on the dollar margin and profitability of Kunlun's city gas projects should be manageable. Earnings volatility from...

Osbert Tang, CFA

Suchuang Gas (1430 HK): Delisting Proposal From CR Gas

This appears a reasonable Offer price. Trading wide at 8.7%/33.3%, probably on account of the prior news leakage. Plus this is not a super liquid...

David Blennerhassett

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