HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>We continued to be cautious on <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> given the challenges faced. It guided for a flat dollar margin in FY23 but we think this is optimistic.</li>
<li>Connection fees are likely to stay under pressure after a 42.1% decline in FY22. It only projects 2.6-2.9m new residential connections for FY23, compared with 2.9m in FY22.</li>
<li>Although China Gas is now the cheapest Hong Kong-listed China gas utilities company, it takes time to regain market confidence. At similar valuation, <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> looks more interesting. </li>
</ul>


We continued to be cautious on China Gas Holdings (384 HK) given the challenges faced. It guided for a flat dollar margin in FY23 but we think this is optimistic.
Connection fees are likely to stay under pressure after a 42.1% decline in FY22. It only projects 2.6-2.9m new residential connections for FY23, compared with 2.9m in FY22.
Although China Gas is now the cheapest Hong Kong-listed China gas utilities company, it takes time to regain market confidence. At similar valuation, Kunlun Energy (135 HK) looks more interesting. 


China Gas Holdings (384 HK): Not Giving It the Benefit of Doubt

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.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.

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

<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> disclosed that it has reached agreement to dispose of its 25% stake in the K&amp;K oilfields in Azerbaijan. Although the transaction is relatively small given that it does not pass the 5% threshold of the listing rule, we still think such a small move has big positive meaning. In our view, the disposal marks an important step in its plan to exit the volatile Exploration &amp; Production segment which dragged on its valuation; and the market should welcome this.The current high oil price environment is good for Kunlun from both an operational and a transactional point of view. We estimate that at crude oil price of US$75/bbl, the E&amp;P segment may bring in an addition of at least Rmb300-400m of pre-tax profit in 2H21. Despite the good share price movement YTD (+73% including dividends), it is still trading on just 11x PER for FY21, the cheapest among its key peers. The removal of a volatile E&amp;P segment from its business portfolio should narrow Kunlun's discount, in our view.

Kunlun Energy (135 HK) disclosed that it has reached agreement to dispose of its 25% stake in the K&amp;K oilfields in Azerbaijan. Although the transaction is relatively small given that it does not pass the 5% threshold of the listing rule, we still think such a small move has big positive meaning. In our view, the disposal marks an important step in its plan to exit the volatile Exploration &amp; Production segment which dragged on its valuation; and the market should welcome this.The current high oil price environment is good for Kunlun from both an operational and a transactional point of view. We estimate that at crude oil price of US$75/bbl, the E&amp;P segment may bring in an addition of at least Rmb300-400m of pre-tax profit in 2H21. Despite the good share price movement YTD (+73% including dividends), it is still trading on just 11x PER for FY21, the cheapest among its key peers. The removal of a volatile E&amp;P segment from its business portfolio should narrow Kunlun's discount, in our view. 

Kunlun Energy (135 HK): Small Move, Big Meaning

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

<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> posted a very impressive 1H21 result with profit from continuing operations soared 249.9% YoY. All business segments recorded profitability improvement with very encouraging 46.7% YoY growth for its natural gas sales business. The exploration and production segment also achieved a good turnaround, thanks to a 28.3% YoY increase in average realised oil price.We believe the market should be happy with Kunlun's 1% increase in natural gas sales dollar margin even in a period of rising LNG price. Also, the solid momentum of new projects, which 16 were added in 1H21, compares well with peers. We think there is upside to our earnings forecasts and its current valuation of 11.5x PER (on continuing operations) for FY21 is appealing relative to peers. More updates will be provided after the post-1H21 result call.

Kunlun Energy (135 HK) posted a very impressive 1H21 result with profit from continuing operations soared 249.9% YoY. All business segments recorded profitability improvement with very encouraging 46.7% YoY growth for its natural gas sales business. The exploration and production segment also achieved a good turnaround, thanks to a 28.3% YoY increase in average realised oil price.We believe the market should be happy with Kunlun's 1% increase in natural gas sales dollar margin even in a period of rising LNG price. Also, the solid momentum of new projects, which 16 were added in 1H21, compares well with peers. We think there is upside to our earnings forecasts and its current valuation of 11.5x PER (on continuing operations) for FY21 is appealing relative to peers. More updates will be provided after the post-1H21 result call.

Kunlun Energy (135 HK): Our Initial Thoughts on 1H21 - Sharply Ahead of Expectations

China

Enn Natural Gas Co.,Ltd. offers natural gas engineering services. The Company provides natural gas engineering investment, gas station construction, and energy equipment distribution services. Enn Natural Gas also operates coal materials, chemicals,  and biopharmaceutical products trading businesses.

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ENN Natural Gas (600803 CH)

China Gas Holdings (384 HK): Not Giving It the Benefit of Doubt

China Gas has a diasppointing FY22 and we think its operating and financial guidances for FY23 are likely to be optimistic. We prefer Kunlun Energy...

Osbert Tang, CFA

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

Kunlun Energy (135 HK): Small Move, Big Meaning

The disposal of the Azerbaijan oilfields, though a small transaction, has significant implication. Kunlun will increasingly become a pure gas...

Osbert Tang, CFA

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

Kunlun Energy (135 HK): Our Initial Thoughts on 1H21 - Sharply Ahead of Expectations

We think the market should welcome Kunlun's very solid 1H21 result, and particularly its 1% expansion in gas sales dollar margin and the turnaround...

Osbert Tang, CFA

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