HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Except <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>, many stocks in the China gas utilities sector are still underperforming the HSI and HSCEI YTD. Yet, industry fundamentals are improving. </li>
<li>More cities and counties will implement a gas price pass-through mechanism, with 90% of cities and counties to be completed by late 2024, benefiting sector profitability.  </li>
<li>Consensus forecasts are still conservative which places room for pick-up in share prices. <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/china-gas-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14315:1" rel="noopener">China Gas Holdings (384 HK)</a> are opportunities.</li>
</ul>


Except ENN Energy (2688 HK), many stocks in the China gas utilities sector are still underperforming the HSI and HSCEI YTD. Yet, industry fundamentals are improving. 
More cities and counties will implement a gas price pass-through mechanism, with 90% of cities and counties to be completed by late 2024, benefiting sector profitability.  
Consensus forecasts are still conservative which places room for pick-up in share prices. CR Gas (1193 HK) and China Gas Holdings (384 HK) are opportunities.


Equity Bottom-Up

<ul>
<li>
<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> is not required to submit a merger control filing to the SAMR, suggesting it is making a step ahead in meeting the pre-conditions. </li>
<li>The use of onshore bank loans and cash balance as a refinancing source and consideration payment will lower financing costs, boosting the value of ENN Natural Gas H-share.</li>
<li>The current share price is 9.3 and 17.7% below the low-bound and high-bound of our estimated value range. It is also less vulnerable to the current tariff war.</li>
</ul>



ENN Energy (2688 HK) is not required to submit a merger control filing to the SAMR, suggesting it is making a step ahead in meeting the pre-conditions. 
The use of onshore bank loans and cash balance as a refinancing source and consideration payment will lower financing costs, boosting the value of ENN Natural Gas H-share.
The current share price is 9.3 and 17.7% below the low-bound and high-bound of our estimated value range. It is also less vulnerable to the current tariff war.


ENN Energy (2688 HK): Privatisation Progressing Well Ahead

<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 healthy 2.6% earnings growth for 1H24. If not for the expiry of two oilfields last year, its earnings growth would have reached 6.8%. </li>
<li>Natural gas sales pre-tax margin contracted 0.5pp YoY, but has recovered significantly HoH. Other businesses have all seen good margin expansion. </li>
<li>The company has further accumulated net cash which increased 8.3% in the last six months. At HK$2.76/share, this equals 35% of the share price.</li>
</ul>



Kunlun Energy (135 HK) posted a healthy 2.6% earnings growth for 1H24. If not for the expiry of two oilfields last year, its earnings growth would have reached 6.8%. 
Natural gas sales pre-tax margin contracted 0.5pp YoY, but has recovered significantly HoH. Other businesses have all seen good margin expansion. 
The company has further accumulated net cash which increased 8.3% in the last six months. At HK$2.76/share, this equals 35% of the share price.


Kunlun Energy (135 HK): The Most Solid Play

<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>'s 2.2% drop in core earnings in FY23 is distorted by the expiry of exploration rights of oilfield projects. All other segments have done well.  </li>
<li>FY24 outlook is positive - reduction in E&amp;P distortion, addition of more city gas projects, higher utilisation of LNG plants and terminals, and optimisation of gas pricing mechanism.</li>
<li>Net cash of Rmb20.4bn equals 29% of market capitalisation, providing room for a higher dividend payout. A re-inclusion into the HSI is not totally out of the cards.</li>
</ul>



Kunlun Energy (135 HK)'s 2.2% drop in core earnings in FY23 is distorted by the expiry of exploration rights of oilfield projects. All other segments have done well.  
FY24 outlook is positive - reduction in E&amp;P distortion, addition of more city gas projects, higher utilisation of LNG plants and terminals, and optimisation of gas pricing mechanism.
Net cash of Rmb20.4bn equals 29% of market capitalisation, providing room for a higher dividend payout. A re-inclusion into the HSI is not totally out of the cards.


Kunlun Energy (135 HK): Delivering Resilience

Asian Hedge Fund Manager, Long Short Equity, Macro

David Mudd

Cross Asset Strategy

<ul>
<li>So far, global markets remain optimistic that the damage from the war in Iran will be repaired relatively soon; however, that will change as the war enters its second month.</li>
<li>Asian countries are highly dependent on oil and gas shipments from the Middle East, with airlines, petrochemical companies, and gas distribution companies all negatively affected.</li>
<li>Iran now controls when the flow of energy from the Middle East starts and thereby when the war stops. Gulf countries will not allow Iran to be the Straits gatekeeper.</li>
</ul>


So far, global markets remain optimistic that the damage from the war in Iran will be repaired relatively soon; however, that will change as the war enters its second month.
Asian countries are highly dependent on oil and gas shipments from the Middle East, with airlines, petrochemical companies, and gas distribution companies all negatively affected.
Iran now controls when the flow of energy from the Middle East starts and thereby when the war stops. Gulf countries will not allow Iran to be the Straits gatekeeper.


OIL: When a Short-Term Spike Becomes Long-Term Reality

Hong Kong

China Gas is a leading energy supplier and service provider primarily engaged in the investment, construction, and management of city gas pipeline infrastructure. It distributes natural gas and liquefied petroleum gas (LPG) to residential, industrial, and commercial users, and operates CNG/LNG refilling stations. The company was founded in 1995 and is headquartered in Hong Kong.

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China Gas (384 HK)

China Gas Utilities: Dark Horses?

China's gas utilities sector's industry fundamentals are improving. Gas price pass-through mechanism to benefit profitability. Room for share...

Osbert Tang, CFA

ENN Energy (2688 HK): Privatisation Progressing Well Ahead

ENN Energy is progressing on meeting pre-conditions, with no merger control filing needed. Refinancing with onshore bank loans and using cash...

Osbert Tang, CFA

Kunlun Energy (135 HK): The Most Solid Play

Kunlun Energy reports 2.6% profit growth in 1H24. Natural gas sales margin contracted YoY but recovered HoH, while other businesses saw margin...

Osbert Tang, CFA

Kunlun Energy (135 HK): Delivering Resilience

Kunlun's FY23 core earnings drop is distorted by oilfield project expiry, but other segments perform well. FY24 outlook is positive with more city...

Osbert Tang, CFA

OIL: When a Short-Term Spike Becomes Long-Term Reality

So far, global markets remain optimistic that the damage from the war in Iran will be repaired relatively soon; however, that will change as the...

David Mudd

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

China Gas Utilities: Dark Horses?

​China's gas utilities sector's industry fundamentals are improving. Gas price pass-through mechanism to benefit profitability. Room for share...

Osbert Tang, CFA

ENN Energy (2688 HK): Privatisation Progressing Well Ahead

​ENN Energy is progressing on meeting pre-conditions, with no merger control filing needed. Refinancing with onshore bank loans and using cash...

Osbert Tang, CFA

Kunlun Energy (135 HK): The Most Solid Play

​Kunlun Energy reports 2.6% profit growth in 1H24. Natural gas sales margin contracted YoY but recovered HoH, while other businesses saw margin...

Osbert Tang, CFA

Kunlun Energy (135 HK): Delivering Resilience

​Kunlun's FY23 core earnings drop is distorted by oilfield project expiry, but other segments perform well. FY24 outlook is positive with more city...

Osbert Tang, CFA

OIL: When a Short-Term Spike Becomes Long-Term Reality

So far, global markets remain optimistic that the damage from the war in Iran will be repaired relatively soon; however, that will change as the...

David Mudd

China's gas utilities sector's industry fundamentals are improving. Gas price pass-through mechanism to benefit profitability. Room for share...

ENN Energy is progressing on meeting pre-conditions, with no merger control filing needed. Refinancing with onshore bank loans and using cash...

Kunlun Energy reports 2.6% profit growth in 1H24. Natural gas sales margin contracted YoY but recovered HoH, while other businesses saw margin...

Kunlun's FY23 core earnings drop is distorted by oilfield project expiry, but other segments perform well. FY24 outlook is positive with more city...