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

Credit Analyst, Lucror Analytics

Chuanyi Zhou

Credit Analyst

High Yield Experts

Lucror Analytics

Lucror Analytics is a leading credit and ESG research specialist and a provider of technology solutions for differentiated fixed income strategies. Our roots are in bottom-up fundamental credit analysis with a specialization in high yield corporate credits from Europe, Asia and Latin America. We are one of few research specialists integrating ESG considerations with fundamental credit research through a dedicated ESG platform. Our ESG assessment covers five key criteria: Disclosure, E,S, & G Pillars, Controversies, ESG Impact on Credit and ESG Momentum.

Recognizing the importance and value-add of Factor Investing in fixed income, Lucror developed the Smart Quant Navigator (SQN), an intuitive platform that helps clients devise and implement factor-based strategies ranging from pure quant to active fundamental, with integrated ESG.

Our company has been at the forefront of developments in the fixed income markets, identifying opportunities and consistently delivering new products and value-adding solutions to clients. Lucror has close relationships with the largest and most reputable asset managers, family offices, hedge funds, investment and wealth managers globally.

Credit

We are initiating coverage on ENN Natural Gas, with a "Hold" recommendation on the VEYONG 3.375 2026 Notes. We view ENN Natural Gas as “Medium Risk” on the LARA scale. This reflects the company’s long operating track record and diversified business profile. These are balanced by its weak financial profile, as well as the exposure to commodity price risks and changes in government policies. In addition, the company has significant related-party transactions. Our fundamental Credit Bias is “Stable”. ENN Natural Gas' financial metrics should be stable going forward, supported by good performance in the downstream city gas operations. However, leverage and liquidity could come under pressure if the company makes further acquisitions to expand its operations in the clean energy sector. We view ENN Natural Gas as “Weak” on the LAGA scale, given the: [1] presence of controlling shareholder Wang Yusuo's family on the Board; [2] opaque related-party structure and ongoing transactions; and [3] questionable reliability of the company's independent auditor, which has been criticised many times by the professional accounting body for poor practices.

 We are initiating coverage on ENN Natural Gas, with a "Hold" recommendation on the VEYONG 3.375 2026 Notes.  We view ENN Natural Gas as “Medium Risk” on the LARA scale. This reflects the company’s long operating track record and diversified business profile. These are balanced by its weak financial profile, as well as the exposure to commodity price risks and changes in government policies. In addition, the company has significant related-party transactions.  Our fundamental Credit Bias is “Stable”. ENN Natural Gas' financial metrics should be stable going forward, supported by good performance in the downstream city gas operations. However, leverage and liquidity could come under pressure if the company makes further acquisitions to expand its operations in the clean energy sector.  We view ENN Natural Gas as “Weak” on the LAGA scale, given the: [1] presence of controlling shareholder Wang Yusuo's family on the Board; [2] opaque related-party structure and ongoing transactions; and [3] questionable reliability of the company's independent auditor, which has been criticised many times by the professional accounting body for poor practices.

ENN Natural Gas - Tear Sheet - Lucror Analytics

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

The most important subsidiary and key source of earnings 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> - unlisted Kunlun Gas - reported a fantastic 42.9% YoY growth in earnings for 1Q21. Even relative to 1Q19, the net profit figure is still 30.8% higher. While gross margin contracted YoY, likely due to higher procurement costs, the exciting volume growth has offset the impact of cost inflation, in our view.Kunlun Gas' 1Q21 net profit already equals to 37.5% of its total in last year, indicating a very positive start for FY21. Moreover, it has a very comfortable gearing of 19.5% and good operating cash flow, meaning that there is no need for it to seek funding from parent Kunlun Energy. Hence, Kunlun Energy can pursue more value-enhancing acquisitions through its cash on hand. All in all, the result implies great start for Kunlun Energy in 1Q21 - Kunlun Gas accounted for 72% of Kunlun Energy's net profit from continuing operations in last year.

The most important subsidiary and key source of earnings of Kunlun Energy (135 HK) - unlisted Kunlun Gas - reported a fantastic 42.9% YoY growth in earnings for 1Q21. Even relative to 1Q19, the net profit figure is still 30.8% higher. While gross margin contracted YoY, likely due to higher procurement costs, the exciting volume growth has offset the impact of cost inflation, in our view.Kunlun Gas' 1Q21 net profit already equals to 37.5% of its total in last year, indicating a very positive start for FY21. Moreover, it has a very comfortable gearing of 19.5% and good operating cash flow, meaning that there is no need for it to seek funding from parent Kunlun Energy. Hence, Kunlun Energy can pursue more value-enhancing acquisitions through its cash on hand. All in all, the result implies great start for Kunlun Energy in 1Q21 - Kunlun Gas accounted for 72% of Kunlun Energy's net profit from continuing operations in last year. 

Kunlun Energy (135 HK): A Fantastic 1Q21 at Kunlun Gas

Share price of <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 dropped by 12.3% in the last three days after the 7.5% new share placement to raise HK$11.6bn. While there will be EPS dilution over the next two years, we still see EPS growth at a decent level with ROE staying high at 22.8% for FY22F. In fact, the frequent corporate moves recently including exploring hydrogen energy, developing LNG terminal and co-operating with major central SOEs are encouraging developments.Its 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> on hydrogen production and hydrogen refueling station will potentially open a growth driver to capture the numerous opportunities in this rapidly growing market segment. Meanwhile, the construction of LNG terminal will provide it a tighter grip on LNG cost and procurement. We see such strategic and operational developments positive to the long-term well-being of China Gas.

Share price of China Gas Holdings (384 HK) has dropped by 12.3% in the last three days after the 7.5% new share placement to raise HK$11.6bn. While there will be EPS dilution over the next two years, we still see EPS growth at a decent level with ROE staying high at 22.8% for FY22F. In fact, the frequent corporate moves recently including exploring hydrogen energy, developing LNG terminal and co-operating with major central SOEs are encouraging developments.Its cooperation with CNOOC Ltd (883 HK) on hydrogen production and hydrogen refueling station will potentially open a growth driver to capture the numerous opportunities in this rapidly growing market segment. Meanwhile, the construction of LNG terminal will provide it a tighter grip on LNG cost and procurement. We see such strategic and operational developments positive to the long-term well-being of China Gas.  

China Gas Holdings (384 HK): Placement, Hydrogen Energy, LNG Terminal and Unicom/Sinopec Co-Ops

China

Enn Natural Gas Co.,Ltd. offers natural gas engineering services. The Company provides natural gas engineering investment, gas station construction, and energy equipment distribution services. Enn Natural Gas also operates coal materials, chemicals,  and biopharmaceutical products trading businesses.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

ENN Natural Gas (600803 CH)

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

ENN Natural Gas - Tear Sheet - Lucror Analytics

We are initiating coverage on ENN Natural Gas, with a "Hold" recommendation on the VEYONG 3.375 2026 Notes. We view ENN Natural Gas as “Medium...

Lucror Analytics

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

Our updated financial projections, referencing its valuation relative to peers, point to the fact that there is still very significant upside...

Osbert Tang, CFA

Kunlun Energy (135 HK): A Fantastic 1Q21 at Kunlun Gas

Kunlun Energy's most important unlisted subsidiary Kunlun Gas achieved net profit growth of 42.9% in 1Q21, and this is an impressive start for the...

Osbert Tang, CFA

China Gas Holdings (384 HK): Placement, Hydrogen Energy, LNG Terminal and Unicom/Sinopec Co-Ops

We are not too negative on the new share placement by China Gas. We think the recent strategic and operational initiatives position it well in the...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)