HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>Dismal share price performance for <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 created an opportunity for bottom fishing. Management also looks positive with 30% profit growth guidance for FY23.</li>
<li>There are rooms for good dollar margin recovery, unit sales rebound and improvement in free cash flow in FY24. Spin-off of value-added services is also a value-enhancing move. </li>
<li>De-Rating over the last three years has put the stock on undemanding multiples of 8x PER and 0.75x P/B. Its 14.8% 3-year EPS CAGR is also better than sector average.</li>
</ul>


Dismal share price performance for China Gas Holdings (384 HK) has created an opportunity for bottom fishing. Management also looks positive with 30% profit growth guidance for FY23.
There are rooms for good dollar margin recovery, unit sales rebound and improvement in free cash flow in FY24. Spin-off of value-added services is also a value-enhancing move. 
De-Rating over the last three years has put the stock on undemanding multiples of 8x PER and 0.75x P/B. Its 14.8% 3-year EPS CAGR is also better than sector average.


China Gas Holdings (384 HK): Worth a Bet Now

<ul>
<li>While <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> expects better gas dollar margin HoH, there are still high profit uncertainties and its full-year operational guidance does not look exciting.</li>
<li>The expectation of flat to 10% YoY decline in new residential household connections is not encouraging. With 1H FY23 profit only amounted to 42% of consensus, we see downgrade risks.</li>
<li>Despite achieving positive free cash flow, its high gearing of 69.9% (+4pp HoH) is still very stretched relative to peers. We prefer <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>.</li>
</ul>


While China Gas Holdings (384 HK) expects better gas dollar margin HoH, there are still high profit uncertainties and its full-year operational guidance does not look exciting.
The expectation of flat to 10% YoY decline in new residential household connections is not encouraging. With 1H FY23 profit only amounted to 42% of consensus, we see downgrade risks.
Despite achieving positive free cash flow, its high gearing of 69.9% (+4pp HoH) is still very stretched relative to peers. We prefer Kunlun Energy (135 HK).


China Gas Holdings (384 HK): Still Not Meeting Expectations

<ul>
<li>With an 18.6% growth in 1H22 profit from continuing operations, <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> has not disappointed us. Natural gas sales segment is a bright spot with solid growth.</li>
<li>Net cash swelled to Rmb10.2bn at end-Jun, about 2x more than the level at end-FY21. We estimate this roughly equals to 19% of the current share price. </li>
<li>New project momentum looks healthy and the market seems to have underestimated FY22 earnings. Its 8x and 7.5x PERs for FY22 and FY23 are clearly attractive. </li>
</ul>


With an 18.6% growth in 1H22 profit from continuing operations, Kunlun Energy (135 HK) has not disappointed us. Natural gas sales segment is a bright spot with solid growth.
Net cash swelled to Rmb10.2bn at end-Jun, about 2x more than the level at end-FY21. We estimate this roughly equals to 19% of the current share price. 
New project momentum looks healthy and the market seems to have underestimated FY22 earnings. Its 8x and 7.5x PERs for FY22 and FY23 are clearly attractive. 


Kunlun Energy (135 HK): An Excellent Show

<ul>
<li>Core net profit rose a healthy 10.9% at <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> in 1H22 despite challenges from pandemic lockdowns and surge in input costs.</li>
<li>We expect to see sequential improvement in both dollar margin for gas sales and overall gross margin in 2H22. Excellent integrated energy pipeline should add to earnings momentum.</li>
<li>Gearing improved 2.2pp in 1H22 and there is more room to deleverage in 2H22. While the stock's valuation is not particularly cheap, it has probably already hit the trough. </li>
</ul>


Core net profit rose a healthy 10.9% at ENN Energy (2688 HK) in 1H22 despite challenges from pandemic lockdowns and surge in input costs.
We expect to see sequential improvement in both dollar margin for gas sales and overall gross margin in 2H22. Excellent integrated energy pipeline should add to earnings momentum.
Gearing improved 2.2pp in 1H22 and there is more room to deleverage in 2H22. While the stock's valuation is not particularly cheap, it has probably already hit the trough. 


ENN Energy (2688 HK): Seeing Sign of an Upturn

<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

China

Bestsun Energy Co., Ltd is a natural gas distributor. The Company invests in natural gas pipelines, liquefied natural gas, and natural gas vehicle fillings stations. Bestsun also provides gas appliances, installations, and maintenances.

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Bestsun Energy Co (600681 CH)

China Gas Holdings (384 HK): Worth a Bet Now

There are rooms for good dollar margin recovery, unit sales rebound and improvement in free cash flow in FY24. Spin-off of value-added services is...

Osbert Tang, CFA

China Gas Holdings (384 HK): Still Not Meeting Expectations

1H FY23 result is disappointing and we see downside risks for consensus forecasts. We think 2H earnings will be at best flattish and its high...

Osbert Tang, CFA

Kunlun Energy (135 HK): An Excellent Show

Impressive 1H22 result is a clear demonstration of Kunlun's operational strengths and cash generating ability. The market should ease concerns on...

Osbert Tang, CFA

ENN Energy (2688 HK): Seeing Sign of an Upturn

Dollar margin recovery, strong integrated energy pipeline and value added business growth are key drivers for ENN Energy in 2H22 and FY23....

Osbert Tang, CFA

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

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