HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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> showcased an encouraging re-acceleration in 2H20 with a growth of 22.8% in its core earnings, though full-year growth of 18.2% is being dragged by the COVID-19 impaired 1H20. Both retail gas sales and value added services have seen their profit momentum recovered in the second half, and the strength for Integrated Energy (IE) stays on course (gross profit +84% YoY in 2H20).Management painted a positive picture for FY21 in the post-result call, as guidance pointed to at least 15% gas volume growth, stable dollar margin, Rmb8-10bn IE revenue (Rmb5bn in FY20) and at least 15% core earnings growth. We think these are all very conservative expectations. 1Q21 gas volume has already grown by over 30% so far, though low base is one of the reasons. We continue to like ENN and maintain that it is the top pick among pure gas utilities companies in China and its premium to sector average is well deserved.

ENN Energy (2688 HK) showcased an encouraging re-acceleration in 2H20 with a growth of 22.8% in its core earnings, though full-year growth of 18.2% is being dragged by the COVID-19 impaired 1H20. Both retail gas sales and value added services have seen their profit momentum recovered in the second half, and the strength for Integrated Energy (IE) stays on course (gross profit +84% YoY in 2H20).Management painted a positive picture for FY21 in the post-result call, as guidance pointed to at least 15% gas volume growth, stable dollar margin, Rmb8-10bn IE revenue (Rmb5bn in FY20) and at least 15% core earnings growth. We think these are all very conservative expectations. 1Q21 gas volume has already grown by over 30% so far, though low base is one of the reasons. We continue to like ENN and maintain that it is the top pick among pure gas utilities companies in China and its premium to sector average is well deserved.

ENN Energy (2688 HK): Well Justifies the Premium; and Management Guides for a Better FY21

<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> finally concluded the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to PipeChina at a very favourable 1.9x P/B multiple. This is significantly better than 1.21x and 1.43x that <a href="https://www.smartkarma.com/entities/petrochina-co-ltd-h" target="_blank" data-smartkarma-citation="entities:262:1" rel="noopener">Petrochina Co Ltd H (857 HK)</a> and <a href="https://www.smartkarma.com/entities/china-petroleum-chemical-h" target="_blank" data-smartkarma-citation="entities:369:1" rel="noopener">China Petroleum &amp; Chemical (386 HK)</a> got from their deals with PipeChina, respectively.With net cash inflow of Rmb37bn, or HK$4.94/share (ie 77% of current share price), Kunlun intends to pay out 50% of such cash. That said, the overall dividend yield for FY21F will reach 40.5%. After the transaction, based on sum-of-the-parts valuation, we place Kunlun at HK$10.58, meaning that it trades on a steep 39% discount. We believe Kunlun will escalate its expansion into the downstream gas sales business going forward, and this should narrow its valuation discount to gas utilities peers.

Kunlun Energy (135 HK) finally concluded the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to PipeChina at a very favourable 1.9x P/B multiple. This is significantly better than 1.21x and 1.43x that Petrochina Co Ltd H (857 HK) and China Petroleum &amp; Chemical (386 HK) got from their deals with PipeChina, respectively.With net cash inflow of Rmb37bn, or HK$4.94/share (ie 77% of current share price), Kunlun intends to pay out 50% of such cash. That said, the overall dividend yield for FY21F will reach 40.5%. After the transaction, based on sum-of-the-parts valuation, we place Kunlun at HK$10.58, meaning that it trades on a steep 39% discount. We believe Kunlun will escalate its expansion into the downstream gas sales business going forward, and this should narrow its valuation discount to gas utilities peers. 

Kunlun Energy (135 HK): Very Favourable Valuation for Pipeline and Dalian LNG Disposals

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With industrial and commercial gas sales yet to fully recover from the negative impact of Covid-19 and lower contribution from connection fees, <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> registered a core profit growth of just 5.5% YoY for 1H FY20/21. Without the impact of Rmb appreciation, this would have grown by 7.8%. An interim DPS of HK$0.10 is declared, same as a year ago. 
Despite a slowing 1H, China Gas introduced its guidance for a 15-20% YoY growth in full-year core profit, suggesting a significant pick-up in 2H. Management expects this to be generated from accelerated gas volume recovery, YoY expansion in dollar margin, good progress on Smart MicroGrid and improving cash flow. The stock now trades on undemanding 3.1x P/B and 12.2x PER for 12-month forward. With our top pick <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> rallied by 40.6% since end-Mar, compared with 5.1% for China Gas and 23.9% for the overall sector, we see room for China Gas to catch up during this winter gas peak season. 
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With industrial and commercial gas sales yet to fully recover from the negative impact of Covid-19 and lower contribution from connection fees, China Gas Holdings (384 HK) registered a core profit growth of just 5.5% YoY for 1H FY20/21. Without the impact of Rmb appreciation, this would have grown by 7.8%. An interim DPS of HK$0.10 is declared, same as a year ago. 
Despite a slowing 1H, China Gas introduced its guidance for a 15-20% YoY growth in full-year core profit, suggesting a significant pick-up in 2H. Management expects this to be generated from accelerated gas volume recovery, YoY expansion in dollar margin, good progress on Smart MicroGrid and improving cash flow. The stock now trades on undemanding 3.1x P/B and 12.2x PER for 12-month forward. With our top pick ENN Energy (2688 HK) rallied by 40.6% since end-Mar, compared with 5.1% for China Gas and 23.9% for the overall sector, we see room for China Gas to catch up during this winter gas peak season. 


China Gas Holdings (384 HK): Slower 1H Growth but Positive Guidance from Post-Result Call

We take <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>'s 13.8% YoY growth in core earnings in 1H20 positively, especially amid the tough operating environment facing the industry. While gas sales profit has slowed, this was partly offset by higher contribution from integrated energy. We are also delighted to see a 5.2% expansion in gas sales dollar margin and a 1.9pp expansion in overall gross margin. Management revealed good gas sales recovery momentum in the last three months and guided for full-year core earnings growth of 15% but we believe this is likely conservative. In 2H20, further contribution from integrated energy, lower input costs, recovery in gas consumption and execution of new projects are the major drivers for ENN. Also, we are comfortable with its financial position, with 40% gearing in 1H20. ENN stays as our top pick in the China gas utilities sector, despite its sharp outperformance against peers YTD.

We take ENN Energy (2688 HK)'s 13.8% YoY growth in core earnings in 1H20 positively, especially amid the tough operating environment facing the industry. While gas sales profit has slowed, this was partly offset by higher contribution from integrated energy. We are also delighted to see a 5.2% expansion in gas sales dollar margin and a 1.9pp expansion in overall gross margin. Management revealed good gas sales recovery momentum in the last three months and guided for full-year core earnings growth of 15% but we believe this is likely conservative. In 2H20, further contribution from integrated energy, lower input costs, recovery in gas consumption and execution of new projects are the major drivers for ENN. Also, we are comfortable with its financial position, with 40% gearing in 1H20. ENN stays as our top pick in the China gas utilities sector, despite its sharp outperformance against peers YTD.  

ENN Energy (2688 HK): Key Takeaways from Post-1H20 Result Call - Still Best Placed in the Sector

<a href="https://www.smartkarma.com/entities/enn-ecological-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:16456:1" rel="noopener">ENN Ecological Holdings (600803 CH)</a> (ENNE) reported a disappointing 81.2% YoY decline in profit in 1Q20, but we believe the focus should be on the progress of the proposed acquisition of a 32.83% stake in <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> (ENN) which will almost completely transform the company. The positive news is that the transaction has already been approved by the China Securities Regulatory Commission earlier this month.We believe the deal is good for ENNE as it can: 1.) swap out its crude oil exposure of<a href="https://www.smartkarma.com/entities/santos-ltd" target="_blank" data-smartkarma-citation="entities:711:1" rel="noopener"> Santos Ltd (STO AU)</a>; 2.) swap in the more stable gas utilities business of ENN; and 3.) improve its financial position. We see ENNE's proforma valuation not too expensive but the key risk still lies on the inability to proceed with the deal (though we think such possibility is low).

ENN Ecological Holdings (600803 CH) (ENNE) reported a disappointing 81.2% YoY decline in profit in 1Q20, but we believe the focus should be on the progress of the proposed acquisition of a 32.83% stake in ENN Energy (2688 HK) (ENN) which will almost completely transform the company. The positive news is that the transaction has already been approved by the China Securities Regulatory Commission earlier this month.We believe the deal is good for ENNE as it can: 1.) swap out its crude oil exposure of Santos Ltd (STO AU); 2.) swap in the more stable gas utilities business of ENN; and 3.) improve its financial position. We see ENNE's proforma valuation not too expensive but the key risk still lies on the inability to proceed with the deal (though we think such possibility is low). 

ENN Ecological (600803 CH): Weak 1Q20 but Metamorphosis in Good Progress

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.

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ENN Natural Gas (600803 CH)

ENN Energy (2688 HK): Well Justifies the Premium; and Management Guides for a Better FY21

ENN Energy logged an impressive earnings acceleration in 2H20 and management suggested that FY21 will also be a nice one on good gas volume and...

Osbert Tang, CFA

Kunlun Energy (135 HK): Very Favourable Valuation for Pipeline and Dalian LNG Disposals

Kunlun secured a very good deal of 1.9x P/B for the disposal of its interest in Beijing pipeline and Dalian LNG. It will payout 50% of proceeds at...

Osbert Tang, CFA

China Gas Holdings (384 HK): Slower 1H Growth but Positive Guidance from Post-Result Call

Despite a slow growth in 1H, financial position and dollar margin have both improved; and it issues encouraging full-year guidances. As a laggard...

Osbert Tang, CFA

ENN Energy (2688 HK): Key Takeaways from Post-1H20 Result Call - Still Best Placed in the Sector

We take ENN Energy (2688 HK)'s 13.8% YoY growth in core earnings in 1H20 positively, especially amid the tough operating environment facing the...

Osbert Tang, CFA

ENN Ecological (600803 CH): Weak 1Q20 but Metamorphosis in Good Progress

ENN Ecological Holdings (600803 CH) (ENNE) reported a disappointing 81.2% YoY decline in profit in 1Q20, but we believe the focus should be on the...

Osbert Tang, CFA

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