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

<ul>
<li>Healthy 17.2% growth in 1Q22 net profit of Kunlun Gas, the most important subsidiary 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>, provides a welcoming evidence to ease market concerns on costs.  </li>
<li>While gross margin was down 0.2pp YoY, it expanded by 0.4pp QoQ. Key cost items including selling, administrative and R&amp;D are all under control, boosting EBIT margin by 0.5pp YoY.</li>
<li>1Q22 is a record quarter for Kunlun Gas, and gearing stays comfortable with strong operating cash flow. We believe such set of result signals good 1Q22 for Kunlun Energy. </li>
</ul>


Healthy 17.2% growth in 1Q22 net profit of Kunlun Gas, the most important subsidiary of Kunlun Energy (135 HK), provides a welcoming evidence to ease market concerns on costs.  
While gross margin was down 0.2pp YoY, it expanded by 0.4pp QoQ. Key cost items including selling, administrative and R&amp;D are all under control, boosting EBIT margin by 0.5pp YoY.
1Q22 is a record quarter for Kunlun Gas, and gearing stays comfortable with strong operating cash flow. We believe such set of result signals good 1Q22 for Kunlun Energy. 


Kunlun Energy (135 HK): A Record Quarter for Kunlun Gas

<ul>
<li>
<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 43.6% YoY growth in net profit for FY21, which is ahead of peers like <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> and <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>. </li>
<li>While 2H21 gas sales segment is weaker, the contraction of dollar margin for Kunlun is light at 3.8% YoY. The other gas utilities companies are seeing 12-15% decline.</li>
<li>Its net cash reached Rmb3.3bn at end-FY21, and number of new city gas projects reached 17 in 2H21, vs. 13 only in 1H21, indicating good pick-up in momentum. </li>
</ul>



Kunlun Energy (135 HK) posted a 43.6% YoY growth in net profit for FY21, which is ahead of peers like ENN Energy (2688 HK) and CR Gas (1193 HK). 
While 2H21 gas sales segment is weaker, the contraction of dollar margin for Kunlun is light at 3.8% YoY. The other gas utilities companies are seeing 12-15% decline.
Its net cash reached Rmb3.3bn at end-FY21, and number of new city gas projects reached 17 in 2H21, vs. 13 only in 1H21, indicating good pick-up in momentum. 


Kunlun Energy (135 HK): Better FY21 than Peers

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

China

Shenzhen Gas Corporation Ltd., supplies gas in Shenzhen. The Company business includes wholesale of gas, pipeline and the supply of bottled gas, investment and construction in the distribution network of gas transmission.

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Shenzhen Gas Corp Ltd A (601139 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): A Record Quarter for Kunlun Gas

We view Kunlun Gas' healthy 1Q22 result a positive pointer to Kunlun Energy's profit trend in the quarter. It is welcoming to note only mild YoY...

Osbert Tang, CFA

Kunlun Energy (135 HK): Better FY21 than Peers

Kunlun has a milder pressue on dollar margin than its peers and the LNG Processing and Terminal segment has provided us some nice surprises. Net...

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

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