Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

<p>The mythical Shangri-la from the book <em>Lost Horizon</em> has never truly been found. Those who have done work on stduying the influences of James' Hilton's book suggest it might be Shambhala from the Tibetan Buddhist tradition, written in the Shambhala Sutra by the Sixth Panchen Lama of Tashihunpo Monastery in Tibet. The Shambhala ideal is one of a realm apart from 'the world' -  a place of timelessness and harmony between man and nature. The Sutra describes parts of Shambhala in Ngari, once part of the kingdom of Guge in western Tibet, and part of the Kunlun mountain range is within Ngari. Other suggestions include parts of Yunnan.</p><p>Getting to Shangri-la for Robert Conway, the protagonist in the book and movie, was somewhat unpleasant. I won't give away the whole book (or movie), but he had to crash a plane to be found, so that he could go on to "find" Shangri-la. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/301/original/Lost-Horizon-1937-A.png?1615732511" class="editor-image img-responsive" data-smartkarma-image-id="194301"></figure><p></p></section><p>Eventually, going over the mountains... </p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/304/original/losthorizonovermountain.jpeg?1615733006" class="editor-image img-responsive" data-smartkarma-image-id="194304"></figure></section></section><p>...while wearing cool hats...</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/303/original/losthorizon+funny+hats.jpeg?1615732715" class="editor-image img-responsive" data-smartkarma-image-id="194303"></figure></section><p>before arriving in Shangri-La.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/305/original/lost-horizon-shangri-la.jpeg?1615733024" class="editor-image img-responsive" data-smartkarma-image-id="194305"></figure></section><hr><h3>Investors seeking Shangri-la by approaching Kunlun from outside will have an easier approach.</h3><h3>It's a Different Kunlun. </h3><ol>
<li>Start by reading <a href="https://www.smartkarma.com/insights/will-investors-find-shangri-la-in-kunlun" target="_blank" data-smartkarma-citation="insights:48113" rel="noopener">Will Investors Find Shangri-La in Kunlun?</a> if you haven't already,</li>
<li>Read the rest of this insight below the fold,</li>
<li>Know that Kunlun shareholders overwhelmingly approved the asset disposal Friday.</li>
<li>Know what the future dividend looks like (it should be just under HK$2.50/share).</li>
<li>Know what the future company looks like <em>ex-dividen</em>d.</li>
<li>Calculate what your equity risk is if you buy the stock (right now it is equity + future cash) today. </li>
</ol><p>The rest is below the fold. </p>

The mythical Shangri-la from the book Lost Horizon has never truly been found. Those who have done work on stduying the influences of James' Hilton's book suggest it might be Shambhala from the Tibetan Buddhist tradition, written in the Shambhala Sutra by the Sixth Panchen Lama of Tashihunpo Monastery in Tibet. The Shambhala ideal is one of a realm apart from 'the world' -  a place of timelessness and harmony between man and nature. The Sutra describes parts of Shambhala in Ngari, once part of the kingdom of Guge in western Tibet, and part of the Kunlun mountain range is within Ngari. Other suggestions include parts of Yunnan.Getting to Shangri-la for Robert Conway, the protagonist in the book and movie, was somewhat unpleasant. I won't give away the whole book (or movie), but he had to crash a plane to be found, so that he could go on to "find" Shangri-la. Eventually, going over the mountains... ...while wearing cool hats...before arriving in Shangri-La.Investors seeking Shangri-la by approaching Kunlun from outside will have an easier approach.It's a Different Kunlun. 
Start by reading Will Investors Find Shangri-La in Kunlun? if you haven't already,
Read the rest of this insight below the fold,
Know that Kunlun shareholders overwhelmingly approved the asset disposal Friday.
Know what the future dividend looks like (it should be just under HK$2.50/share).
Know what the future company looks like ex-dividend.
Calculate what your equity risk is if you buy the stock (right now it is equity + future cash) today. 
The rest is below the fold. 

Kunlun Energy (135 HK): It's Different Than You Think

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Quantitative Analysis

<p>EM Energy allocations are at record lows.  A big exodus in the first half of 2020 pushed allocations to their lowest levels since our records start in 2008.   The aggressive scaling back of positioning had a dramatic effect on prices, with the MSCI EM Energy sector suffering one of the worst 12 month periods of underperformance in nearly 2 decades.  But the ownership picture is beginning to stabilize.  </p><p>On a stock level, <a href="https://www.smartkarma.com/entities/lukoil-pjsc-2bfe0130-461e-4ff3-af12-93bec12e6325" target="_blank" data-smartkarma-citation="entities:27148:1" rel="noopener">LUKOIL (LKOH RM)</a> appears to be the GOAT, with its backing of almost half of the funds in our analysis, well spread across the style spectrum in addition to being a net overweight.  <a href="https://www.smartkarma.com/entities/reliance-industries-ltd" target="_blank" data-smartkarma-citation="entities:198:1" rel="noopener"> Reliance Industries (RIL IN)</a> is also a high conviction stock, held by fewer funds than Lukoil but in greater size.  It also represents a significant underweight to many EM investors.  The most depressed stock of the larger holdings is <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a> , once held by over 60% of the funds in our analysis, now by just 24%.</p><p><em>Analysis taken from our EM research, covering the collective allocations of 242 Global Emerging Market active funds, with combined AUM of $460bn</em></p>

EM Energy allocations are at record lows.  A big exodus in the first half of 2020 pushed allocations to their lowest levels since our records start in 2008.   The aggressive scaling back of positioning had a dramatic effect on prices, with the MSCI EM Energy sector suffering one of the worst 12 month periods of underperformance in nearly 2 decades.  But the ownership picture is beginning to stabilize.  On a stock level, LUKOIL (LKOH RM) appears to be the GOAT, with its backing of almost half of the funds in our analysis, well spread across the style spectrum in addition to being a net overweight.   Reliance Industries (RIL IN) is also a high conviction stock, held by fewer funds than Lukoil but in greater size.  It also represents a significant underweight to many EM investors.  The most depressed stock of the larger holdings is CNOOC Ltd (883 HK) , once held by over 60% of the funds in our analysis, now by just 24%.Analysis taken from our EM research, covering the collective allocations of 242 Global Emerging Market active funds, with combined AUM of $460bn

EM Energy: Big Underperformance - Positioning at Record Lows, but Stabilizing.

Event-Driven

<p>In 1933, British author James Hilton published a book called <em>Lost Horizon</em>, which was four years later more famously made into a movie of the same name by Frank Capra. The movie depicts a love story in a mythical utopia hidden in the mountains - a paradise removed from the earth, unbothered by the cares of the world, where people live very long lives in harmony with each other and their environment. </p><p>It is a fabulous movie in terms of scenery and sets, though its treatment of non-western culture is somewhat 1937-ish.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/188/506/original/ronald+colman.jpg?1613231797" class="editor-image img-responsive" data-smartkarma-image-id="188506"></figure></section><p>The name of this temperate paradise on earth "found" by plane crash survivor Robert Conway (the character played by Ronald Colman) is the now-famous <strong>Shangri-La</strong> and it is at the western end of the <strong>Kunlun Mountains (崑崙山). </strong></p><p>The subject of this insight is Kunlun Energy (昆侖能源有限公司) and as you can see, the characters of the two Kunluns have nothing to do with each other, but it's a nice movie. </p><h3>The News and The Backdrop</h3><p>On 22 December last year, HK-listed China energy investment holdco <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> made an announcement regarding the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to an entity called PipeChina, which is 29.9% owned by <a href="https://www.smartkarma.com/entities/petrochina-co-ltd-h" target="_blank" data-smartkarma-citation="entities:262:1" rel="noopener">PetroChina (857 HK)</a>. </p><p><a href="https://www.smartkarma.com/profiles/osbert-tang-cfa" target="_blank" data-smartkarma-citation="accounts:3879" rel="noopener">Osbert Tang, CFA</a> published a report on 23 December regarding the sale, and subsequently another in the middle of January regarding how Kunlun Energy would look on a pro-forma basis afterwards. </p><p>I think this deserves a closer look. </p>

In 1933, British author James Hilton published a book called Lost Horizon, which was four years later more famously made into a movie of the same name by Frank Capra. The movie depicts a love story in a mythical utopia hidden in the mountains - a paradise removed from the earth, unbothered by the cares of the world, where people live very long lives in harmony with each other and their environment. It is a fabulous movie in terms of scenery and sets, though its treatment of non-western culture is somewhat 1937-ish.The name of this temperate paradise on earth "found" by plane crash survivor Robert Conway (the character played by Ronald Colman) is the now-famous Shangri-La and it is at the western end of the Kunlun Mountains (崑崙山). The subject of this insight is Kunlun Energy (昆侖能源有限公司) and as you can see, the characters of the two Kunluns have nothing to do with each other, but it's a nice movie. The News and The BackdropOn 22 December last year, HK-listed China energy investment holdco Kunlun Energy (135 HK) made an announcement regarding the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to an entity called PipeChina, which is 29.9% owned by PetroChina (857 HK). Osbert Tang, CFA published a report on 23 December regarding the sale, and subsequently another in the middle of January regarding how Kunlun Energy would look on a pro-forma basis afterwards. I think this deserves a closer look. 

Will Investors Find Shangri-La in Kunlun?

HK/China Equity Long-Short

Osbert Tang, CFA

<p>We think <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> will become an attractive gas utilities company after it completed the transaction to dispose of its Beijing Pipeline and Dalian LNG. By then, we see over 70% of its earnings will derive from natural gas sales business, a profile that compares well with its peers in the gas utilities sector.</p><p>In valuation terms, the new Kunlun will trade on just 10.5x PER for FY22F, well below 14x for its peers. While its ROE is lower than peers, this is due to its huge cash on hand even after the distribution of special dividends. Its FY22F P/B of 0.64x (on ex-special dividend basis) appears undemanding, especially given that, before making any investment in natural gas end-user sales business with the proceeds as planned, net cash (after special dividend) will still amount to 57% of the share price. </p>

We think Kunlun Energy (135 HK) will become an attractive gas utilities company after it completed the transaction to dispose of its Beijing Pipeline and Dalian LNG. By then, we see over 70% of its earnings will derive from natural gas sales business, a profile that compares well with its peers in the gas utilities sector.In valuation terms, the new Kunlun will trade on just 10.5x PER for FY22F, well below 14x for its peers. While its ROE is lower than peers, this is due to its huge cash on hand even after the distribution of special dividends. Its FY22F P/B of 0.64x (on ex-special dividend basis) appears undemanding, especially given that, before making any investment in natural gas end-user sales business with the proceeds as planned, net cash (after special dividend) will still amount to 57% of the share price. 

Kunlun Energy (135 HK): How Will the New Kunlun Look Like?

<p><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.</p><p>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. </p>

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

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)