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Morningstar, Inc.

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Thematic (Sector/Industry)

China Utilities / Thematic (Sector/Industry)

<div class="content-highlight"><h2>Rising LNG imports and creation of the national pipeline company.</h2></div><hr><p>To meet the strong growth in China's natural gas demand, there are several challenges that will need to be tackled to ensure an efficient development of supporting infrastructure and services. The complexity of raising pricing, and improving resource efficiency while continuing to encourage consumers to shift to natural gas may continue to lead to delays. We think the government will still gingerly test changes, but we also think key policy moves are forthcoming including the creation of a national pipeline company, or NPC. As such, we see opportunities arise. In particular, we think LNG importers will benefit from the strong gas demand. As well, companies with substantial pipeline assets, mainly <a href="https://www.smartkarma.com/entities/petrochina-co-ltd" target="_blank" data-smartkarma-citation="entities:24656:1">PetroChina (601857 CH)</a>, should see valuation gains from its divestments.</p><hr><h2>Key Takeaways</h2><ul>
<li>The creation of an NPC will allow PetroChina and <a href="https://www.smartkarma.com/entities/china-petroleum-chemical-a" target="_blank" data-smartkarma-citation="entities:24650:1">China Petroleum &amp; Chemical-A (600028 CH)</a>, or Sinopec, to realize value for their oil and gas pipeline assets. That said, we would expect the NPC exercise to take around four years given the complexity of the exercise. Between the two, PetroChina stands to gain most as the spin-off will free up capital commitments and allow the company to spend on improving its downstream efficiency and potentially address its aging upstream assets through acquisitions. In addition, the progress toward market-based natural gas pricing should allow the company to gradually see profit from its natural gas imports.</li>
<li>We estimate that the value of the NPC will total CNY 873 billion. This is higher than the CNY 500 billion mentioned in most media reports, which also forms the current consensus view.</li>
<li>PetroChina is the main beneficiary but the one-off revaluation gain is only expected to raise its fair value estimate by 4%. Sinopec also stands to benefit but we expect minimal impact on our fair value estimate as we had already factored in some asset revaluation gain for the firm, following the approval of its marketing segment spin-off. We would wait for more buffer before buying both companies.</li>
<li>We believe <a href="https://www.smartkarma.com/entities/enn-energy-holdings-ltd" target="_blank" data-smartkarma-citation="entities:316:1">Enn Energy Holdings (2688 HK)</a> is undervalued and the firm is a main beneficiary of rising LNG imports in China. We think ENN could potentially benefit from lower raw material costs following the completion of the Zhoushan LNG receiving terminal (which started operation in end 2018 and is owned by parent, ENN Group). The firm has strategically secured long-term LNG supplies at competitive costs.</li>
</ul>

Rising LNG imports and creation of the national pipeline company.To meet the strong growth in China's natural gas demand, there are several challenges that will need to be tackled to ensure an efficient development of supporting infrastructure and services. The complexity of raising pricing, and improving resource efficiency while continuing to encourage consumers to shift to natural gas may continue to lead to delays. We think the government will still gingerly test changes, but we also think key policy moves are forthcoming including the creation of a national pipeline company, or NPC. As such, we see opportunities arise. In particular, we think LNG importers will benefit from the strong gas demand. As well, companies with substantial pipeline assets, mainly PetroChina (601857 CH), should see valuation gains from its divestments.Key Takeaways
The creation of an NPC will allow PetroChina and China Petroleum &amp; Chemical-A (600028 CH), or Sinopec, to realize value for their oil and gas pipeline assets. That said, we would expect the NPC exercise to take around four years given the complexity of the exercise. Between the two, PetroChina stands to gain most as the spin-off will free up capital commitments and allow the company to spend on improving its downstream efficiency and potentially address its aging upstream assets through acquisitions. In addition, the progress toward market-based natural gas pricing should allow the company to gradually see profit from its natural gas imports.
We estimate that the value of the NPC will total CNY 873 billion. This is higher than the CNY 500 billion mentioned in most media reports, which also forms the current consensus view.
PetroChina is the main beneficiary but the one-off revaluation gain is only expected to raise its fair value estimate by 4%. Sinopec also stands to benefit but we expect minimal impact on our fair value estimate as we had already factored in some asset revaluation gain for the firm, following the approval of its marketing segment spin-off. We would wait for more buffer before buying both companies.
We believe Enn Energy Holdings (2688 HK) is undervalued and the firm is a main beneficiary of rising LNG imports in China. We think ENN could potentially benefit from lower raw material costs following the completion of the Zhoushan LNG receiving terminal (which started operation in end 2018 and is owned by parent, ENN Group). The firm has strategically secured long-term LNG supplies at competitive costs.


China Petroleum & Chemical Cor (600028 CH)

Constraints in China's Natural Gas Sector Present Opportunities