HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>Core 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> rose 25.2% in FY22, providing solid evidence for its strength against peers. We are delighted to see dollar margin even expanded 4.1%.</li>
<li>Pace of new project addition has not weakened as it secured 25 new projects in FY22. Collectively, they will increase sales volume by 3.2bn cu.m., 7% of FY22 volume.</li>
<li>Net cash of Rmb13.6bn equals 28% of share price, making 8.9% ROE look decent. Market earnings forecast is too low; and even so, it trades on just 7.2x FY23 PER.</li>
</ul>


Core earnings of Kunlun Energy (135 HK) rose 25.2% in FY22, providing solid evidence for its strength against peers. We are delighted to see dollar margin even expanded 4.1%.
Pace of new project addition has not weakened as it secured 25 new projects in FY22. Collectively, they will increase sales volume by 3.2bn cu.m., 7% of FY22 volume.
Net cash of Rmb13.6bn equals 28% of share price, making 8.9% ROE look decent. Market earnings forecast is too low; and even so, it trades on just 7.2x FY23 PER.


Kunlun Energy (135 HK): Rock Solid as Usual

<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

<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 net profit grew 7.9% in 2H24, accelerating from 2.6% in 1H24. It is encouraging to see the dividend payout ratio increase by 2pp YoY.</li>
<li>An increase in the adoption of the residential price linkage system is positive for the dollar margin, while the distortion from E&amp;P expiry will no longer impact earnings. </li>
<li>With net cash equals HK$2.56/share, or 31% of the share price, such financial strength is unmatched by peers. Its PER valuations are also inexpensive.</li>
</ul>



Kunlun Energy (135 HK)'s net profit grew 7.9% in 2H24, accelerating from 2.6% in 1H24. It is encouraging to see the dividend payout ratio increase by 2pp YoY.
An increase in the adoption of the residential price linkage system is positive for the dollar margin, while the distortion from E&amp;P expiry will no longer impact earnings. 
With net cash equals HK$2.56/share, or 31% of the share price, such financial strength is unmatched by peers. Its PER valuations are also inexpensive.


Kunlun Energy (135 HK): Remains Very Decent

<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

Hong Kong

Kunlun Energy Company Ltd, through its subsidiaries, explores and produces crude oil and natural gas in China.

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Kunlun Energy (135 HK)