HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<ul>
<li>
<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>’s privatisation bid for <a href="https://www.smartkarma.com/entities/suchuang-gas-corp-ltd" target="_blank" data-smartkarma-citation="entities:304:1" rel="noopener">Suchuang Gas Corp (1430 HK)</a> was derailed by the trading suspension due to the disclosure of previously unaccounted for pledges/guarantees by subsidiaries.</li>
<li>The controlling shareholders have attempted to keep the offer alive by agreeing to fully indemnify CR Gas for losses related to the pledges/guarantees.</li>
<li>The long stop date of the offer was extended to 31 August 2022. The key risk is that the timeframe to fulfil the resumption guidance exceeds the long stop date. </li>
</ul>



CR Gas (1193 HK)’s privatisation bid for Suchuang Gas Corp (1430 HK) was derailed by the trading suspension due to the disclosure of previously unaccounted for pledges/guarantees by subsidiaries.
The controlling shareholders have attempted to keep the offer alive by agreeing to fully indemnify CR Gas for losses related to the pledges/guarantees.
The long stop date of the offer was extended to 31 August 2022. The key risk is that the timeframe to fulfil the resumption guidance exceeds the long stop date. 


Suchuang Gas’ Privatisation Offer in Limbo as Additional Resumption Guidance Disclosed

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

<ul>
<li>Shortly after piped natural gas operator <strong><a href="https://www.smartkarma.com/entities/suchuang-gas-corp-ltd" target="_blank" data-smartkarma-citation="entities:304:1" rel="noopener">Suchuang Gas Corp (1430 HK)</a></strong> announced a privatisation Offer from <strong><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></strong> last August, shares were suspended. And remain suspended today.</li>
<li>That suspension pivoted off previously unreleased information that certain bank deposits of Suchuang Gas' subsidiaries had been pledged. </li>
<li>An investigation remains ongoing. A material portion of those pledges have defaulted. Financial results have been delayed. However, the Offer appears to still be moving forward. </li>
</ul>


Shortly after piped natural gas operator Suchuang Gas Corp (1430 HK) announced a privatisation Offer from CR Gas (1193 HK) last August, shares were suspended. And remain suspended today.
That suspension pivoted off previously unreleased information that certain bank deposits of Suchuang Gas' subsidiaries had been pledged. 
An investigation remains ongoing. A material portion of those pledges have defaulted. Financial results have been delayed. However, the Offer appears to still be moving forward. 


Suchuang Gas (1430 HK): Pledges, Results Delays, And Ongoing Suspension

<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

<ul>
<li>Core earnings growth of 14.6% YoY 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> is not very exciting. Gas sales gross profit was down 5% while integrated energy looks better with 51.2% growth.</li>
<li>Management guidance of 12-15% growth in FY22 seems to be optimistic, especially in a period of time where high input cost is likely to eat into margin still.</li>
<li>Valuations are not too stretched, yet not very appealing. Its net debt position also does not compare well with <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/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a>. </li>
</ul>


Core earnings growth of 14.6% YoY at ENN Energy (2688 HK) is not very exciting. Gas sales gross profit was down 5% while integrated energy looks better with 51.2% growth.
Management guidance of 12-15% growth in FY22 seems to be optimistic, especially in a period of time where high input cost is likely to eat into margin still.
Valuations are not too stretched, yet not very appealing. Its net debt position also does not compare well with CR Gas (1193 HK) and Kunlun Energy (135 HK). 


ENN Energy (2688 HK): Mediocre FY21, Management Update Not Exciting

Hong Kong

China Resources Gas Group Limited is an investment holding company primarily engaged in the sale and distribution of natural and liquefied gas, and the construction and connection of gas pipelines. The company also offers comprehensive services including the sale of gas appliances and related products, and provides design, construction, consultancy, and management services for gas connection projects, as well as operating gas stations. It was incorporated in 1994 and is based in Wan Chai, Hong Kong.

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China Resources Gas (1193 HK)

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

Suchuang Gas’ Privatisation Offer in Limbo as Additional Resumption Guidance Disclosed

The controlling shareholders have kept the offer alive by agreeing to indemnify CR Gas for losses. The key risk is that the timeframe to fulfil the...

Arun George

Suchuang Gas (1430 HK): Pledges, Results Delays, And Ongoing Suspension

An investigation remains ongoing into the pledged bank deposits. A material portion of those pledges have defaulted. However, the Offer appears to...

David Blennerhassett

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

ENN Energy (2688 HK): Mediocre FY21, Management Update Not Exciting

ENN Energy's FY21 result is not particularly encouraging and we also found management's update on the post-result call not very exciting....

Osbert Tang, CFA

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