HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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> has underperformed the gas utilities sector average by a massive 26pp over the last three months. While the dilution from its Apr placement and its Shiyan, Hubei gas project explosion in Jun are reasons, we think that the depressed valuations should have reflected most of the negative concerns. At 12x PER and 1.9x P/B, it is cheaper than peers like <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> and <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>. We see room to narrow such underperformance.Despite the Shiyan explosion incident, China Gas has managed to sign a strategic cooperation agreement in Aug with Xiangyang, which is the third-largest city in Hubei. We think this suggested that the incident does not have significant impact on its ability to secure projects in the province. Its new businesses include LPG Smart MicroGrid and distributed urban heating are both progressing well, and such initiatives to be potential added drivers. Lastly, its expansion into hydrogen energy on cooperation with <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a> may be a wild card in the long term.

China Gas Holdings (384 HK) has underperformed the gas utilities sector average by a massive 26pp over the last three months. While the dilution from its Apr placement and its Shiyan, Hubei gas project explosion in Jun are reasons, we think that the depressed valuations should have reflected most of the negative concerns. At 12x PER and 1.9x P/B, it is cheaper than peers like CR Gas (1193 HK) and ENN Energy (2688 HK). We see room to narrow such underperformance.Despite the Shiyan explosion incident, China Gas has managed to sign a strategic cooperation agreement in Aug with Xiangyang, which is the third-largest city in Hubei. We think this suggested that the incident does not have significant impact on its ability to secure projects in the province. Its new businesses include LPG Smart MicroGrid and distributed urban heating are both progressing well, and such initiatives to be potential added drivers. Lastly, its expansion into hydrogen energy on cooperation with CNOOC Ltd (883 HK) may be a wild card in the long term.

China Gas Holdings (384 HK): Looks like the Negatives Have Been Well Factored In

<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> should have a decent operating performance in 1H21, with good growth achieved for natural gas sales, LPG sales, LNG terminal and also the exploration and production segment. Their performance all look to be ahead of the full-year guidance put forward in FY20 result announcement in Mar 2021 - this is encouraging.Gas project M&amp;A momentum stays decent and, with IRRs of 10-12%, the returns are ahead of the hurdle level of 8%. Following <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>  Shiyan gas explosion, local governments now prefer large SOEs to invest in projects given their more stringent safety standards, and this is an advantage of Kunlun. The gas industry also entails less regulatory risks amid government's heightened regulatory measures towards various industries lately. The recent pull-back has made valuations even more appealing, in our view.

Kunlun Energy (135 HK) should have a decent operating performance in 1H21, with good growth achieved for natural gas sales, LPG sales, LNG terminal and also the exploration and production segment. Their performance all look to be ahead of the full-year guidance put forward in FY20 result announcement in Mar 2021 - this is encouraging.Gas project M&amp;A momentum stays decent and, with IRRs of 10-12%, the returns are ahead of the hurdle level of 8%. Following China Gas Holdings' (384 HK)  Shiyan gas explosion, local governments now prefer large SOEs to invest in projects given their more stringent safety standards, and this is an advantage of Kunlun. The gas industry also entails less regulatory risks amid government's heightened regulatory measures towards various industries lately. The recent pull-back has made valuations even more appealing, in our view.  

Kunlun Energy (135 HK): Positive Takeaways from Discussion with Company

Despite the good share price performance after going ex-dividends, <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> still has significant upside potential, in our view. YTD, industry and peer figures have already showed a very solid underlying picture of China's gas consumption market. We updated our financial projections to incorporate the good 1Q21 result of Kunlun Gas, particularly to reflect the lower-than-expected minority interests which means that its wholly-owned subsidiaries are more profitable than non-wholly-owned which is a fact likely to be missed by the market.We project 3-year EPS CAGR of 20% for Kunlun's continuing operations, with ROE of 10.9% for FY22; and the stock trades on just 10.9x PER for FY21F and 0.9x P/B for FY22F. Such growth, return and valuation metrics clearly put the stock in an attractive zone relative to the peers' multiples - average sector growth is 15.9% at PER of 15.6x and average ROE of 17.7% at 2.2x P/B. More importantly, we see its net cash over the next two years to amount to 26-37% of the current share price.

Despite the good share price performance after going ex-dividends, Kunlun Energy (135 HK) still has significant upside potential, in our view. YTD, industry and peer figures have already showed a very solid underlying picture of China's gas consumption market. We updated our financial projections to incorporate the good 1Q21 result of Kunlun Gas, particularly to reflect the lower-than-expected minority interests which means that its wholly-owned subsidiaries are more profitable than non-wholly-owned which is a fact likely to be missed by the market.We project 3-year EPS CAGR of 20% for Kunlun's continuing operations, with ROE of 10.9% for FY22; and the stock trades on just 10.9x PER for FY21F and 0.9x P/B for FY22F. Such growth, return and valuation metrics clearly put the stock in an attractive zone relative to the peers' multiples - average sector growth is 15.9% at PER of 15.6x and average ROE of 17.7% at 2.2x P/B. More importantly, we see its net cash over the next two years to amount to 26-37% of the current share price.

Kunlun Energy (135 HK): Updated Financial Projections Point to Still Very Undemanding Valuations

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

The Dividend has gone Ex. And the shares fell sharply. That was nuts. At one point the shares were trading HK$5.75 which was down 4% from the previous close on a dividend adjusted basis (HK$8.81 less HK$2.8041 gets one to HK$6.00 and HK$5.75 is a bit more than 4% down from that adjusted basis. Shares, of course, closed higher at HK$5.86 - down about 2.5% on the day. Today, shares bounced nearly 5% as the three HK-listed peers averaged a slight fall. On a dividend-adjusted basis, it has been a good two days, but on a dividend-adjusted basis, Kunlun is up 7% vs peers from Monday morning. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/210/505/original/Screenshot+2021-06-01+at+8.05.52+PM.png?1622549225" class="editor-image img-responsive" data-smartkarma-image-id="210505"></figure></section>But that is not the reason for the insight. The reason for this insight is a technical thing.

The Dividend has gone Ex. And the shares fell sharply. That was nuts. At one point the shares were trading HK$5.75 which was down 4% from the previous close on a dividend adjusted basis (HK$8.81 less HK$2.8041 gets one to HK$6.00 and HK$5.75 is a bit more than 4% down from that adjusted basis. Shares, of course, closed higher at HK$5.86 - down about 2.5% on the day. Today, shares bounced nearly 5% as the three HK-listed peers averaged a slight fall. On a dividend-adjusted basis, it has been a good two days, but on a dividend-adjusted basis, Kunlun is up 7% vs peers from Monday morning. But that is not the reason for the insight. The reason for this insight is a technical thing. 

Kunlun Energy (135 HK) - Choose Your Fighter (With That One Neat Trick!)

Chart based progressive global trading strategies, Chart Partners

Thomas Schroeder

Chart based progressive global trading strategies

Chart Partners

Chart Partners objective is to discover medium-term cycle turns and profit opportunities before they unfold, within structural trends while preserving capital with clear degrees of risk. We have real return ideas. 

Markets are dynamic and trading systems must reflect this. It is crucial to determine underlying correlations and lead-lag relationships within global markets and the impact on linked instruments. Our weekly Chartonics product gives you short-term trading strategies that can be applied within the medium and longer term macro trends that are mapped out in our strategy updates. 

Our methodology fuses global market variables and isolates drivers in trends. We specialize in FX, index trade in NY and Asia with a focus on Asian stocks. 

Technical Analysis

<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> was already setting up for a top before the special dividend and sides with Kunlun witnessing continued downside pressure to higher degree long support near the 5.0 and 4.70 key supports. Use an uptick to sell or even short near gap resistance.Gap below wedge support stands out as a negative on the back of the rejection at the 6.50 old high zone.MACD bear set up noteworthy and will weigh on near term price action and again in late June.Trendline and price support is the zone to pinpoint a fresh long.

Kunlun Energy (135 HK) was already setting up for a top before the special dividend and sides with Kunlun witnessing continued downside pressure to higher degree long support near the 5.0 and 4.70 key supports. Use an uptick to sell or even short near gap resistance.Gap below wedge support stands out as a negative on the back of the rejection at the 6.50 old high zone.MACD bear set up noteworthy and will weigh on near term price action and again in late June.Trendline and price support is the zone to pinpoint a fresh long.

Hong Kong

KunLun Energy is an integrated oil and gas service company engaged in the exploration, development, and production of crude oil and natural gas. It operates natural gas pipelines, processes and stores liquefied natural gas (LNG), and sells LNG and liquefied petroleum gas (LPG) across China. The company is headquartered in Hong Kong and was founded in 1994.

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KunLun Energy (135 HK)

China Gas Holdings (384 HK): Looks like the Negatives Have Been Well Factored In

China Gas' depressed share price should have reflected the negatives related to share placement and Shiyan explosion. Its new business momentum...

Osbert Tang, CFA