HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

We came out of the post-1H21 result call 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> with unchanged positive view, and the message from management suggested that outlook for 2H21 stay promising and the pull-back in share price is unwarranted. We increased our earnings forecasts and based on our latest projections, Kunlun is trading on just 9.2x PER for FY21 (on continuing operations), making it the cheapest among China's gas utilities stocks.We think the good new project momentum, stable margin outlook, commencement of new projects, better profitability at LNG terminals and stronger LPG volume are the major drivers for Kunlun. We estimate an ROE of 10.6% for FY21, and yet it will still be in a net cash position at end-FY21, which compares well with most peers which are at much higher leverage levels.

We came out of the post-1H21 result call of Kunlun Energy (135 HK) with unchanged positive view, and the message from management suggested that outlook for 2H21 stay promising and the pull-back in share price is unwarranted. We increased our earnings forecasts and based on our latest projections, Kunlun is trading on just 9.2x PER for FY21 (on continuing operations), making it the cheapest among China's gas utilities stocks.We think the good new project momentum, stable margin outlook, commencement of new projects, better profitability at LNG terminals and stronger LPG volume are the major drivers for Kunlun. We estimate an ROE of 10.6% for FY21, and yet it will still be in a net cash position at end-FY21, which compares well with most peers which are at much higher leverage levels.

Kunlun Energy (135 HK): Quick Take After Post-1H21 Call, Stays Positive

<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 very impressive 1H21 result with profit from continuing operations soared 249.9% YoY. All business segments recorded profitability improvement with very encouraging 46.7% YoY growth for its natural gas sales business. The exploration and production segment also achieved a good turnaround, thanks to a 28.3% YoY increase in average realised oil price.We believe the market should be happy with Kunlun's 1% increase in natural gas sales dollar margin even in a period of rising LNG price. Also, the solid momentum of new projects, which 16 were added in 1H21, compares well with peers. We think there is upside to our earnings forecasts and its current valuation of 11.5x PER (on continuing operations) for FY21 is appealing relative to peers. More updates will be provided after the post-1H21 result call.

Kunlun Energy (135 HK) posted a very impressive 1H21 result with profit from continuing operations soared 249.9% YoY. All business segments recorded profitability improvement with very encouraging 46.7% YoY growth for its natural gas sales business. The exploration and production segment also achieved a good turnaround, thanks to a 28.3% YoY increase in average realised oil price.We believe the market should be happy with Kunlun's 1% increase in natural gas sales dollar margin even in a period of rising LNG price. Also, the solid momentum of new projects, which 16 were added in 1H21, compares well with peers. We think there is upside to our earnings forecasts and its current valuation of 11.5x PER (on continuing operations) for FY21 is appealing relative to peers. More updates will be provided after the post-1H21 result call.

Kunlun Energy (135 HK): Our Initial Thoughts on 1H21 - Sharply Ahead of Expectations

We see the 1H21 earnings report of <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 a healthy one, given a 18.4% YoY growth in core earnings. Its gross margin contracted 0.7pp YoY with only gas wholesale segment recording margin expansion. In particular, just 11% growth in retail gas gross profit and a Rmb0.05/cu.m. or about 8.2% YoY contraction in dollar margin are concerns.Management expects slower gas sales growth in 2H21 with stable margin. It secured 4 new city-gas projects in 1H21 which looks slow, though the integrated energy segment has 16 new projects. While the 1H21 result itself is not bad, we think its 20.6x PER for FY21 does not provide much upside potential from current level. After a 45% rally YTD and only 9.2% off all-time high, we see risk that ENN is vulnerable to profit-taking in the near term, based on the excuse of weaker-than-expected retail gas business.

We see the 1H21 earnings report of ENN Energy (2688 HK) is a healthy one, given a 18.4% YoY growth in core earnings. Its gross margin contracted 0.7pp YoY with only gas wholesale segment recording margin expansion. In particular, just 11% growth in retail gas gross profit and a Rmb0.05/cu.m. or about 8.2% YoY contraction in dollar margin are concerns.Management expects slower gas sales growth in 2H21 with stable margin. It secured 4 new city-gas projects in 1H21 which looks slow, though the integrated energy segment has 16 new projects. While the 1H21 result itself is not bad, we think its 20.6x PER for FY21 does not provide much upside potential from current level. After a 45% rally YTD and only 9.2% off all-time high, we see risk that ENN is vulnerable to profit-taking in the near term, based on the excuse of weaker-than-expected retail gas business.  

ENN Energy (2688 HK): Concerns on Margin Squeeze, Key Takeaways from Post-Result Call

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Our neutral and cautious outlook continues to be reinforced by market dynamics that have generally deteriorated over the past week. RS improvement for defensives (Utilities, Staples, Real Estate, and Health Care) continues to make these Sectors attractive. Meanwhile, not one MSCI ACWI Sector is breaking down, and important price support levels are holding in the US, Europe, and Japan. Until supports start to break we cannot be bearish, though we would not be surprised to see ~5% downside with potential for more.

Our neutral and cautious outlook continues to be reinforced by market dynamics that have generally deteriorated over the past week. RS improvement for defensives (Utilities, Staples, Real Estate, and Health Care) continues to make these Sectors attractive. Meanwhile, not one MSCI ACWI Sector is breaking down, and important price support levels are holding in the US, Europe, and Japan. Until supports start to break we cannot be bearish, though we would not be surprised to see ~5% downside with potential for more.

Crude Oil and Copper Breakdowns Reinforce Our Concerns; Defensive Sectors Remain Attractive

<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

Hong Kong

China Resources Gas Group Ltd distributes natural gas and petroleum gas in the cities of Chengdu, Fuyang, Huaibei, Linhai, Suzhou and Wuxi in the PRC. The Company also operates compressed natural gas filling stations in Chengdu, Nanjing and Wuxi. The group also is involved in bottled liquefied petroleum gas distribution in cities of Fuyang, Suzhou and Wuxi.

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CR Gas (1193 HK)

Kunlun Energy (135 HK): Quick Take After Post-1H21 Call, Stays Positive

Our impression on Kunlun remains unchanged after the post-1H21 result call. Outlook is still encouraging and new project momentum is solid. Our...

Osbert Tang, CFA

Kunlun Energy (135 HK): Our Initial Thoughts on 1H21 - Sharply Ahead of Expectations

We think the market should welcome Kunlun's very solid 1H21 result, and particularly its 1% expansion in gas sales dollar margin and the turnaround...

Osbert Tang, CFA

ENN Energy (2688 HK): Concerns on Margin Squeeze, Key Takeaways from Post-Result Call

ENN's has a healthy 1H21 but the concerns are the slow growth in retail gas segment and the sharp contraction in margin. With 45% YTD rally and at...

Osbert Tang, CFA

Crude Oil and Copper Breakdowns Reinforce Our Concerns; Defensive Sectors Remain Attractive

Our cautious outlook is reinforced by ongoing developments. Relative strength improvement for defensives (Utilities, Staples, Real Estate, Health...

Vermilion Research

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

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