HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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 post-FY20 result conference call revealed that the company sees a stable growth in FY21, with improvement expected for the natural gas, LNG processing and exploration &amp; production (E&amp;P) segments. The company also highlights that the new management that come on board in Nov 2020 will push for more involvement in new energy. Based on our back-of-the-envelope calculation, Kunlun's earnings growth will range between 25-28% in FY21, depending largely on the extent of the turnaround of the E&amp;P segment. On such expectation, we still see Kunlun trades on undemanding 8.8x PER for FY21, with a net cash position even after paying out the special dividends.

Kunlun Energy (135 HK)'s post-FY20 result conference call revealed that the company sees a stable growth in FY21, with improvement expected for the natural gas, LNG processing and exploration &amp; production (E&amp;P) segments. The company also highlights that the new management that come on board in Nov 2020 will push for more involvement in new energy. Based on our back-of-the-envelope calculation, Kunlun's earnings growth will range between 25-28% in FY21, depending largely on the extent of the turnaround of the E&amp;P segment. On such expectation, we still see Kunlun trades on undemanding 8.8x PER for FY21, with a net cash position even after paying out the special dividends.

Kunlun Energy (135 HK): Key Takeaways from Post-Result Call

<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> announced good FY20 result with its continuing operations (excluding the disposal of pipeline and Dalian LNG terminal) registered a 47.8% YoY earnings growth. Interestingly, profit for its discontinued operations witnessed a 20.6% YoY decline.Two immediate bright spots from the result announcement are: 1.) a special DPS of Rmb2.1366 is declared, in line with its guidance of 50% of the proceeds from disposal. Note that this is still subject to several conditions, meaning that the transaction is not yet completed as of 23 Mar; 2.) better profit at the remaining CORE natural gas business, with pre-tax profit up 28.1%.  For the special dividends, management still expects them to be paid on or before 30 Jul 2021.We estimate Kunlun's continuing operations is trading on 11x PER for FY20, much lower than other gas utilities peers. We will provide more update after the analyst presentation.

Kunlun Energy (135 HK) announced good FY20 result with its continuing operations (excluding the disposal of pipeline and Dalian LNG terminal) registered a 47.8% YoY earnings growth. Interestingly, profit for its discontinued operations witnessed a 20.6% YoY decline.Two immediate bright spots from the result announcement are: 1.) a special DPS of Rmb2.1366 is declared, in line with its guidance of 50% of the proceeds from disposal. Note that this is still subject to several conditions, meaning that the transaction is not yet completed as of 23 Mar; 2.) better profit at the remaining CORE natural gas business, with pre-tax profit up 28.1%.  For the special dividends, management still expects them to be paid on or before 30 Jul 2021.We estimate Kunlun's continuing operations is trading on 11x PER for FY20, much lower than other gas utilities peers. We will provide more update after the analyst presentation. 

Kunlun Energy (135 HK): Quick Update on FY20 Result And, More Importantly, Special Dividends

<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> showcased an encouraging re-acceleration in 2H20 with a growth of 22.8% in its core earnings, though full-year growth of 18.2% is being dragged by the COVID-19 impaired 1H20. Both retail gas sales and value added services have seen their profit momentum recovered in the second half, and the strength for Integrated Energy (IE) stays on course (gross profit +84% YoY in 2H20).Management painted a positive picture for FY21 in the post-result call, as guidance pointed to at least 15% gas volume growth, stable dollar margin, Rmb8-10bn IE revenue (Rmb5bn in FY20) and at least 15% core earnings growth. We think these are all very conservative expectations. 1Q21 gas volume has already grown by over 30% so far, though low base is one of the reasons. We continue to like ENN and maintain that it is the top pick among pure gas utilities companies in China and its premium to sector average is well deserved.

ENN Energy (2688 HK) showcased an encouraging re-acceleration in 2H20 with a growth of 22.8% in its core earnings, though full-year growth of 18.2% is being dragged by the COVID-19 impaired 1H20. Both retail gas sales and value added services have seen their profit momentum recovered in the second half, and the strength for Integrated Energy (IE) stays on course (gross profit +84% YoY in 2H20).Management painted a positive picture for FY21 in the post-result call, as guidance pointed to at least 15% gas volume growth, stable dollar margin, Rmb8-10bn IE revenue (Rmb5bn in FY20) and at least 15% core earnings growth. We think these are all very conservative expectations. 1Q21 gas volume has already grown by over 30% so far, though low base is one of the reasons. We continue to like ENN and maintain that it is the top pick among pure gas utilities companies in China and its premium to sector average is well deserved.

ENN Energy (2688 HK): Well Justifies the Premium; and Management Guides for a Better FY21

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

Last evening, Hang Seng Indexes announced the conclusions of the market consultation on the "Proposal to enhance the Hang Seng Index as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market".Apart from the changes to the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a>, it was also decided that the weight of all <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> constituents, including Secondary Listings and WVR Securities, would be capped at 8%. While this was not a part of the market consultation, we had highlighted this as a possibility in our earlier <a href="https://www.smartkarma.com/insights/hscei-dividends-structural-sell-bank-dividends-the-swing-factor" target="_blank" rel="noopener">Insight</a>.Post the 2 inclusions and 4 deletions in the March review, we see a further 3 potential changes at the June review.The big impact of the 8% cap on index constituents will be felt on the HSCEI dividend futures market. With a bulk of the 2021 dividends scheduled to go ex after the implementation of the rebalance, the dividend futures should move lower. The HSCEI 2021/22 dividend steepener should trade less negative than where it has been trading prior to the announcement.In this Insight, we look at the potential changes and their impact on the stocks and the dividend futures.<div class="content-highlight">This Insight is marked Bearish since we expect the HSCEI 2021 dividend futures to move lower.</div>

Last evening, Hang Seng Indexes announced the conclusions of the market consultation on the "Proposal to enhance the Hang Seng Index as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market".Apart from the changes to the Hong Kong Hang Seng Index (HSI INDEX), it was also decided that the weight of all Hang Seng China Enterprises Index (HSCEI INDEX) constituents, including Secondary Listings and WVR Securities, would be capped at 8%. While this was not a part of the market consultation, we had highlighted this as a possibility in our earlier Insight.Post the 2 inclusions and 4 deletions in the March review, we see a further 3 potential changes at the June review.The big impact of the 8% cap on index constituents will be felt on the HSCEI dividend futures market. With a bulk of the 2021 dividends scheduled to go ex after the implementation of the rebalance, the dividend futures should move lower. The HSCEI 2021/22 dividend steepener should trade less negative than where it has been trading prior to the announcement.In this Insight, we look at the potential changes and their impact on the stocks and the dividend futures.This Insight is marked Bearish since we expect the HSCEI 2021 dividend futures to move lower.

HSCEI June Index Rebalance Preview: Potential Changes & Impact of 8% Cap on Dividends

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.For the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a>, there are 2 inclusions and 4 exclusions. This brings the number of index constituents back down to 50.The inclusions are <a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a> and <a href="https://www.smartkarma.com/entities/nongfu-spring" target="_blank" data-smartkarma-citation="entities:28955:1" rel="noopener">Nongfu Spring (9633 HK)</a>, while the exclusions are <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a>, <a href="https://www.smartkarma.com/entities/petrochina-co-ltd-h" target="_blank" data-smartkarma-citation="entities:262:1" rel="noopener">PetroChina (857 HK)</a>, <a href="https://www.smartkarma.com/entities/hengan-intl-group-co-ltd" target="_blank" data-smartkarma-citation="entities:29:1" rel="noopener">Hengan Intl Group (1044 HK)</a> and <a href="https://www.smartkarma.com/entities/china-resources-gas-group-ltd" target="_blank" data-smartkarma-citation="entities:20525:1" rel="noopener">China Resources Gas (1193 HK)</a>.One-way turnover is estimated at 5.62% and will result in a one-way trade of HK$4.10bn. The highest impact is on <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> at 3.5 days of ADV to sell from passive funds, while <a href="https://www.smartkarma.com/entities/china-resources-gas-group-ltd" target="_blank" data-smartkarma-citation="entities:20525:1" rel="noopener">China Resources Gas (1193 HK)</a> has almost 3 days of ADV to sell.There are only 10 trading days to implementation of the changes, but the changes were largely expected. We had <a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a> as a lower probability inclusion and <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> as a lower probability deletion, and there could be a larger impact on these two stocks.The conclusions of the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> market consultation are scheduled to be announced on Monday, 1 March. Depending on the increase in number of index constituents and the changes to the index methodology, some of the HSCEI inclusions/ exclusions could be added to/ deleted from the HSI at the June review and could result in additional same way flow on the stocks.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.For the Hang Seng China Enterprises Index (HSCEI INDEX), there are 2 inclusions and 4 exclusions. This brings the number of index constituents back down to 50.The inclusions are Country Garden Services Holdings (6098 HK) and Nongfu Spring (9633 HK), while the exclusions are China Conch Venture Holdings (586 HK), PetroChina (857 HK), Hengan Intl Group (1044 HK) and China Resources Gas (1193 HK).One-way turnover is estimated at 5.62% and will result in a one-way trade of HK$4.10bn. The highest impact is on China Conch Venture Holdings (586 HK) at 3.5 days of ADV to sell from passive funds, while China Resources Gas (1193 HK) has almost 3 days of ADV to sell.There are only 10 trading days to implementation of the changes, but the changes were largely expected. We had Country Garden Services Holdings (6098 HK) as a lower probability inclusion and China Conch Venture Holdings (586 HK) as a lower probability deletion, and there could be a larger impact on these two stocks.The conclusions of the Hong Kong Hang Seng Index (HSI INDEX) market consultation are scheduled to be announced on Monday, 1 March. Depending on the increase in number of index constituents and the changes to the index methodology, some of the HSCEI inclusions/ exclusions could be added to/ deleted from the HSI at the June review and could result in additional same way flow on the stocks.

HSCEI Index Rebalance: Two In, Four Out Brings Us Back to 50; HSI Consultation Could Increase Flow

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): Key Takeaways from Post-Result Call

Kunlun's post-result call suggested a stable growth expectation for FY21, and we estimate 25-28% growth. There will be more involvement in new...

Osbert Tang, CFA

Kunlun Energy (135 HK): Quick Update on FY20 Result And, More Importantly, Special Dividends

Kunlun has a good FY20 with better than expected natural gas sales profitability. It also declared special dividends from the pipeline and Dalian...

Osbert Tang, CFA

ENN Energy (2688 HK): Well Justifies the Premium; and Management Guides for a Better FY21

ENN Energy logged an impressive earnings acceleration in 2H20 and management suggested that FY21 will also be a nice one on good gas volume and...

Osbert Tang, CFA

HSCEI June Index Rebalance Preview: Potential Changes & Impact of 8% Cap on Dividends

The change in capping at 8% in the HSCEI at the June 21 review will result in large turnover at the review. The change will have a large impact on...

Brian Freitas

HSCEI Index Rebalance: Two In, Four Out Brings Us Back to 50; HSI Consultation Could Increase Flow

There are 2 adds and 4 deletes to the HSCEI. Some stocks have decent impact in the 10 days to implementation. There could be additional flow...

Brian Freitas

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