HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>
<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> posted weak 1H FY22 result with a 18.6% contraction in core profit, driven primarily by lower new connections and weaker dollar margin for gas sales. </li>
<li>Full-Year guidance on new connections has revised to 3m (vs. 5m) and dollar margin will further contract by HK$0.04-0.06/cu.m. in 2H FY22. Progress on LPG Smart MicroGrid has slowed. </li>
<li>The Shiyan gas explosion looks to have a more long-lasting effect than expected. Also, the need to divert management attention to safety enforcement also weighed on China Gas.</li>
</ul>



China Gas Holdings (384 HK) posted weak 1H FY22 result with a 18.6% contraction in core profit, driven primarily by lower new connections and weaker dollar margin for gas sales. 
Full-Year guidance on new connections has revised to 3m (vs. 5m) and dollar margin will further contract by HK$0.04-0.06/cu.m. in 2H FY22. Progress on LPG Smart MicroGrid has slowed. 
The Shiyan gas explosion looks to have a more long-lasting effect than expected. Also, the need to divert management attention to safety enforcement also weighed on China Gas.


China Gas Holdings (384 HK): Post-Result Call Takeaways, Looks like Not yet Reached the Bottom

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<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> is the dominant piped natural gas operator in Taicang, Jiangsu Province. After market close on Wednesday, it announced a privatisation offer by way of a scheme of arrangement from <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>. The offeror will offer either a cash alternative (HK$2.50 in cash for each scheme share) or a share alternative (1 new share in HoldCo for every scheme share).The bid represents a premium of 27.6% over the closing price of HK$1.96 per share on the undisturbed date (10 August 2021 prior to irregular price movements) and a premium of 2.9% over the closing price of HK$2.43 per share on the last trading date (13 August 2021 prior to the trading halt). The completion conditions include regulatory approvals from the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and State Administration for Market Regulation (SAMR). As CR Gas is a subsidiary of China Resources (Holdings) Company Limited, an SOE, regulatory approval should be forthcoming. <div class="content-highlight">The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and &lt;10% rejection by all disinterested shareholders. As disinterested scheme shareholders represent 565.4 million shares or 62.61% of shares outstanding, the 10% blocking stake is 56.5 million shares or 6.26% of shares outstanding. Excluding the irrecovables, no disinterested shareholder holds a blocking stake. Overall, we think the offer price is ok and that the privatisation bid will be successful. </div>

Suchuang Gas Corp (1430 HK) is the dominant piped natural gas operator in Taicang, Jiangsu Province. After market close on Wednesday, it announced a privatisation offer by way of a scheme of arrangement from CR Gas (1193 HK). The offeror will offer either a cash alternative (HK$2.50 in cash for each scheme share) or a share alternative (1 new share in HoldCo for every scheme share).The bid represents a premium of 27.6% over the closing price of HK$1.96 per share on the undisturbed date (10 August 2021 prior to irregular price movements) and a premium of 2.9% over the closing price of HK$2.43 per share on the last trading date (13 August 2021 prior to the trading halt). The completion conditions include regulatory approvals from the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and State Administration for Market Regulation (SAMR). As CR Gas is a subsidiary of China Resources (Holdings) Company Limited, an SOE, regulatory approval should be forthcoming. The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and &lt;10% rejection by all disinterested shareholders. As disinterested scheme shareholders represent 565.4 million shares or 62.61% of shares outstanding, the 10% blocking stake is 56.5 million shares or 6.26% of shares outstanding. Excluding the irrecovables, no disinterested shareholder holds a blocking stake. Overall, we think the offer price is ok and that the privatisation bid will be successful. 

Suchuang Gas’ Privatisation Bid from CR Gas

We came out of the post-1H21 result call 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> with unchanged positive view, and the message from management suggested that outlook for 2H21 stay promising and the pull-back in share price is unwarranted. We increased our earnings forecasts and based on our latest projections, Kunlun is trading on just 9.2x PER for FY21 (on continuing operations), making it the cheapest among China's gas utilities stocks.We think the good new project momentum, stable margin outlook, commencement of new projects, better profitability at LNG terminals and stronger LPG volume are the major drivers for Kunlun. We estimate an ROE of 10.6% for FY21, and yet it will still be in a net cash position at end-FY21, which compares well with most peers which are at much higher leverage levels.

We came out of the post-1H21 result call of Kunlun Energy (135 HK) with unchanged positive view, and the message from management suggested that outlook for 2H21 stay promising and the pull-back in share price is unwarranted. We increased our earnings forecasts and based on our latest projections, Kunlun is trading on just 9.2x PER for FY21 (on continuing operations), making it the cheapest among China's gas utilities stocks.We think the good new project momentum, stable margin outlook, commencement of new projects, better profitability at LNG terminals and stronger LPG volume are the major drivers for Kunlun. We estimate an ROE of 10.6% for FY21, and yet it will still be in a net cash position at end-FY21, which compares well with most peers which are at much higher leverage levels.

Kunlun Energy (135 HK): Quick Take After Post-1H21 Call, Stays Positive

We see the 1H21 earnings report of <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 a healthy one, given a 18.4% YoY growth in core earnings. Its gross margin contracted 0.7pp YoY with only gas wholesale segment recording margin expansion. In particular, just 11% growth in retail gas gross profit and a Rmb0.05/cu.m. or about 8.2% YoY contraction in dollar margin are concerns.Management expects slower gas sales growth in 2H21 with stable margin. It secured 4 new city-gas projects in 1H21 which looks slow, though the integrated energy segment has 16 new projects. While the 1H21 result itself is not bad, we think its 20.6x PER for FY21 does not provide much upside potential from current level. After a 45% rally YTD and only 9.2% off all-time high, we see risk that ENN is vulnerable to profit-taking in the near term, based on the excuse of weaker-than-expected retail gas business.

We see the 1H21 earnings report of ENN Energy (2688 HK) is a healthy one, given a 18.4% YoY growth in core earnings. Its gross margin contracted 0.7pp YoY with only gas wholesale segment recording margin expansion. In particular, just 11% growth in retail gas gross profit and a Rmb0.05/cu.m. or about 8.2% YoY contraction in dollar margin are concerns.Management expects slower gas sales growth in 2H21 with stable margin. It secured 4 new city-gas projects in 1H21 which looks slow, though the integrated energy segment has 16 new projects. While the 1H21 result itself is not bad, we think its 20.6x PER for FY21 does not provide much upside potential from current level. After a 45% rally YTD and only 9.2% off all-time high, we see risk that ENN is vulnerable to profit-taking in the near term, based on the excuse of weaker-than-expected retail gas business.  

ENN Energy (2688 HK): Concerns on Margin Squeeze, Key Takeaways from Post-Result Call

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Our neutral and cautious outlook continues to be reinforced by market dynamics that have generally deteriorated over the past week. RS improvement for defensives (Utilities, Staples, Real Estate, and Health Care) continues to make these Sectors attractive. Meanwhile, not one MSCI ACWI Sector is breaking down, and important price support levels are holding in the US, Europe, and Japan. Until supports start to break we cannot be bearish, though we would not be surprised to see ~5% downside with potential for more.

Our neutral and cautious outlook continues to be reinforced by market dynamics that have generally deteriorated over the past week. RS improvement for defensives (Utilities, Staples, Real Estate, and Health Care) continues to make these Sectors attractive. Meanwhile, not one MSCI ACWI Sector is breaking down, and important price support levels are holding in the US, Europe, and Japan. Until supports start to break we cannot be bearish, though we would not be surprised to see ~5% downside with potential for more.

Crude Oil and Copper Breakdowns Reinforce Our Concerns; Defensive Sectors Remain Attractive

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.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

CR Gas (1193 HK)

China Gas Holdings (384 HK): Post-Result Call Takeaways, Looks like Not yet Reached the Bottom

Weaker-than-expected result for 1H FY22 is negative and management turned more cautious on outlook for 2H FY22, pointing to lower new connections...

Osbert Tang, CFA

Suchuang Gas’ Privatisation Bid from CR Gas

Suchuang Gas received a privatisation offer from CR Gas for a cash alternative (HK$2.50) or a share alternative. We think the offer price is ok and...

Arun George

Kunlun Energy (135 HK): Quick Take After Post-1H21 Call, Stays Positive

Our impression on Kunlun remains unchanged after the post-1H21 result call. Outlook is still encouraging and new project momentum is solid. Our...

Osbert Tang, CFA

ENN Energy (2688 HK): Concerns on Margin Squeeze, Key Takeaways from Post-Result Call

ENN's has a healthy 1H21 but the concerns are the slow growth in retail gas segment and the sharp contraction in margin. With 45% YTD rally and at...

Osbert Tang, CFA

Crude Oil and Copper Breakdowns Reinforce Our Concerns; Defensive Sectors Remain Attractive

Our cautious outlook is reinforced by ongoing developments. Relative strength improvement for defensives (Utilities, Staples, Real Estate, Health...

Vermilion Research

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)