Utilities Sector

In this briefing:

1. (Mostly) Asia M&A: June 2020 Roundup
2. GULF: Upside from Investment in INTUCH
3. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

1. (Mostly) Asia M&A: June 2020 Roundup

2. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

3. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

In this briefing:

1. (Mostly) Asia M&A: June 2020 Roundup
2. GULF: Upside from Investment in INTUCH
3. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call
4. ACE: Great Growth Opportunities, but the Stock Is Overpriced

1. (Mostly) Asia M&A: June 2020 Roundup

2. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

3. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

4. ACE: Great Growth Opportunities, but the Stock Is Overpriced

We initiate coverage on ACE with a SELL recommendation based on a target price of Bt2.64, implying a downside of 36% from the current price. We derive the target price from a de-rating to a 25% premium to the sector PE ratio, meaning a 2020E 29.4x PE.

Investment thesis:

• Power producer with high growth potential, but already priced in
• Long-term contracts and supply control drive high profitability
• Government driven demand can pose a risk

Risks: Adverse regulatory changes, reliance on a few customers, volatility in fuel prices, unexpected disruptions in production, delays in project execution, change in political leadership can sometimes impact companies.

In this briefing:

1. GULF: Short Term Negative Sentiments from Capital Increase
2. Gulf Energy Placement – No Big Deal
3. Zenith Energy: Done Deal As PEP Bumps
4. Beijing Jingneng Clean Energy’s Potential Privatisation Bid
5. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?

1. GULF: Short Term Negative Sentiments from Capital Increase

We see the fall in GULF’s share price by 9% due to the news on capital increase and ADB’s divestment of stake in GULF as an opportunity for accumulative buying given there is minimal impact to our valuation. Thus, we maintain our positive outlook and recommend BUY with a target price of Bt45.4 derived using sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• GULF announced increase of paid-up capital from Bt10.66bn to Bt11.73bn by issuing new 1.07bn common shares through rights offering.
• Limited impact on GULFS valuation from ADB’s divestment of 1.7% stake in the company.

2. Gulf Energy Placement – No Big Deal

Asian Development Bank (ADB) is looking to sell 176m shares in Gulf Energy Development Public Company (GULF TB), worth about US$200m. Post selldown, ADB will still have about 1.35% of stake in GULF. 

In this note, we will look at deal dynamics, recent performance, and run the deal through our framework.

We have covered GULF’s IPO in:

• GULF Energy IPO Review – Largest Power Plant Operator by Planned Capacity with Decent Upside 

3. Zenith Energy: Done Deal As PEP Bumps

The New News

This morning Elemental Infrastructure increased the cash price to A$1.05/share from $1.01/share. The Offer is now best and final – provided no competing proposal emerges.

• The Scheme Consideration will include a fully franked special dividend of A$00.14/share. 
• More importantly, Westoz said it would vote in favour of the Scheme.  Shareholders have until the 29 July to submit their proxies or to change any exiting proxy.
• The revised Offer price is a 51.1% premium to the undisturbed price and above the independent experts’ range of A$0.89-A$1.02. 

This deal is done. Given the benefits of the franking credits to those shareholders who can take advantage, this is trading tight to terms.

4. Beijing Jingneng Clean Energy’s Potential Privatisation Bid

Beijing Jingneng Clean Energy (579 HK)/BJCE is the largest gas-fired heat and power supplier in Beijing and the leading wind power operator in China. On 6 July, it announced a possible privatisation bid from Beijing Energy Holding through a conditional voluntary cash general offer. Beijing Energy Holding and concert parties have a combined 71.40% stake (100% of domestic shares and 16.7% of H-shares). This potential privatisation joins a list of recent SOE privatisations of clean energy companies – Huadian Fuxin Energy Corp (816 HK),  Huaneng Renewables Corp H (958 HK) and CP Clean Energy and the potential privatisation of CGN New Energy Holdings (1811 HK).

5. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?

Beijing Jingneng Clean Energy (579 HK), an SOE utility, was suspended Friday morning pursuant to the Code on Takeovers and Mergers. Should an Offer be tabled, this would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

In this briefing:

1. Gulf Energy Placement – No Big Deal
2. Zenith Energy: Done Deal As PEP Bumps
3. Beijing Jingneng Clean Energy’s Potential Privatisation Bid
4. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?
5. (Mostly) Asia M&A: June 2020 Roundup

1. Gulf Energy Placement – No Big Deal

Asian Development Bank (ADB) is looking to sell 176m shares in Gulf Energy Development Public Company (GULF TB), worth about US$200m. Post selldown, ADB will still have about 1.35% of stake in GULF. 

In this note, we will look at deal dynamics, recent performance, and run the deal through our framework.

We have covered GULF’s IPO in:

• GULF Energy IPO Review – Largest Power Plant Operator by Planned Capacity with Decent Upside 

2. Zenith Energy: Done Deal As PEP Bumps

The New News

This morning Elemental Infrastructure increased the cash price to A$1.05/share from $1.01/share. The Offer is now best and final – provided no competing proposal emerges.

• The Scheme Consideration will include a fully franked special dividend of A$00.14/share. 
• More importantly, Westoz said it would vote in favour of the Scheme.  Shareholders have until the 29 July to submit their proxies or to change any exiting proxy.
• The revised Offer price is a 51.1% premium to the undisturbed price and above the independent experts’ range of A$0.89-A$1.02. 

This deal is done. Given the benefits of the franking credits to those shareholders who can take advantage, this is trading tight to terms.

3. Beijing Jingneng Clean Energy’s Potential Privatisation Bid

Beijing Jingneng Clean Energy (579 HK)/BJCE is the largest gas-fired heat and power supplier in Beijing and the leading wind power operator in China. On 6 July, it announced a possible privatisation bid from Beijing Energy Holding through a conditional voluntary cash general offer. Beijing Energy Holding and concert parties have a combined 71.40% stake (100% of domestic shares and 16.7% of H-shares). This potential privatisation joins a list of recent SOE privatisations of clean energy companies – Huadian Fuxin Energy Corp (816 HK),  Huaneng Renewables Corp H (958 HK) and CP Clean Energy and the potential privatisation of CGN New Energy Holdings (1811 HK).

4. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?

Beijing Jingneng Clean Energy (579 HK), an SOE utility, was suspended Friday morning pursuant to the Code on Takeovers and Mergers. Should an Offer be tabled, this would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

5. (Mostly) Asia M&A: June 2020 Roundup

In this briefing:

1. GULF: Upside from Investment in INTUCH
2. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call
3. ACE: Great Growth Opportunities, but the Stock Is Overpriced

1. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

2. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

3. ACE: Great Growth Opportunities, but the Stock Is Overpriced

We initiate coverage on ACE with a SELL recommendation based on a target price of Bt2.64, implying a downside of 36% from the current price. We derive the target price from a de-rating to a 25% premium to the sector PE ratio, meaning a 2020E 29.4x PE.

Investment thesis:

• Power producer with high growth potential, but already priced in
• Long-term contracts and supply control drive high profitability
• Government driven demand can pose a risk

Risks: Adverse regulatory changes, reliance on a few customers, volatility in fuel prices, unexpected disruptions in production, delays in project execution, change in political leadership can sometimes impact companies.

In this briefing:

1. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call
2. ACE: Great Growth Opportunities, but the Stock Is Overpriced

1. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

2. ACE: Great Growth Opportunities, but the Stock Is Overpriced

We initiate coverage on ACE with a SELL recommendation based on a target price of Bt2.64, implying a downside of 36% from the current price. We derive the target price from a de-rating to a 25% premium to the sector PE ratio, meaning a 2020E 29.4x PE.

Investment thesis:

• Power producer with high growth potential, but already priced in
• Long-term contracts and supply control drive high profitability
• Government driven demand can pose a risk

Risks: Adverse regulatory changes, reliance on a few customers, volatility in fuel prices, unexpected disruptions in production, delays in project execution, change in political leadership can sometimes impact companies.

In this briefing:

1. Zenith Energy: Done Deal As PEP Bumps
2. Beijing Jingneng Clean Energy’s Potential Privatisation Bid
3. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?
4. (Mostly) Asia M&A: June 2020 Roundup
5. GULF: Upside from Investment in INTUCH

1. Zenith Energy: Done Deal As PEP Bumps

The New News

This morning Elemental Infrastructure increased the cash price to A$1.05/share from $1.01/share. The Offer is now best and final – provided no competing proposal emerges.

• The Scheme Consideration will include a fully franked special dividend of A$00.14/share. 
• More importantly, Westoz said it would vote in favour of the Scheme.  Shareholders have until the 29 July to submit their proxies or to change any exiting proxy.
• The revised Offer price is a 51.1% premium to the undisturbed price and above the independent experts’ range of A$0.89-A$1.02. 

This deal is done. Given the benefits of the franking credits to those shareholders who can take advantage, this is trading tight to terms.

2. Beijing Jingneng Clean Energy’s Potential Privatisation Bid

Beijing Jingneng Clean Energy (579 HK)/BJCE is the largest gas-fired heat and power supplier in Beijing and the leading wind power operator in China. On 6 July, it announced a possible privatisation bid from Beijing Energy Holding through a conditional voluntary cash general offer. Beijing Energy Holding and concert parties have a combined 71.40% stake (100% of domestic shares and 16.7% of H-shares). This potential privatisation joins a list of recent SOE privatisations of clean energy companies – Huadian Fuxin Energy Corp (816 HK),  Huaneng Renewables Corp H (958 HK) and CP Clean Energy and the potential privatisation of CGN New Energy Holdings (1811 HK).

3. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?

Beijing Jingneng Clean Energy (579 HK), an SOE utility, was suspended Friday morning pursuant to the Code on Takeovers and Mergers. Should an Offer be tabled, this would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

4. (Mostly) Asia M&A: June 2020 Roundup

5. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

In this briefing:

1. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call
2. ACE: Great Growth Opportunities, but the Stock Is Overpriced
3. China Yangtze Power (600900 CH): Pre-GDR Initial Thoughts

1. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

2. ACE: Great Growth Opportunities, but the Stock Is Overpriced

We initiate coverage on ACE with a SELL recommendation based on a target price of Bt2.64, implying a downside of 36% from the current price. We derive the target price from a de-rating to a 25% premium to the sector PE ratio, meaning a 2020E 29.4x PE.

Investment thesis:

• Power producer with high growth potential, but already priced in
• Long-term contracts and supply control drive high profitability
• Government driven demand can pose a risk

Risks: Adverse regulatory changes, reliance on a few customers, volatility in fuel prices, unexpected disruptions in production, delays in project execution, change in political leadership can sometimes impact companies.

3. China Yangtze Power (600900 CH): Pre-GDR Initial Thoughts

China Yangtze Power Co, Ltd. (600900 CH) (CYPC), the world’s largest hydropower company, will put forward its GDR issuance proposal for shareholder voting in an EGM on 30 Jun. We take a look on this proposal which may raise up to ~US$3.3bn based on the current share price. We believe the key merits for CYPC are: 1.) largest hydropower company globally with protected franchise; 2.) benefit from government’s clean energy initiatives; 3.) track record of stable earnings; and 4.) solid support from parent company.

Key risks, however, are: 1.) CYPC relies on one single type of generation mode; 2.) capex on acquisitions may further elevate gearing; 3.) slowdown in power demand; and 4.) overseas investment risks. The stock now trades on 17.9x FY20F PER, not excessive relative to the 5-year range of 13-27x, and upside will come from further asset injections from parent China Three Gorges Corporation (CTG).

In this briefing:

1. Beijing Jingneng Clean Energy’s Potential Privatisation Bid
2. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?
3. (Mostly) Asia M&A: June 2020 Roundup
4. GULF: Upside from Investment in INTUCH
5. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

1. Beijing Jingneng Clean Energy’s Potential Privatisation Bid

Beijing Jingneng Clean Energy (579 HK)/BJCE is the largest gas-fired heat and power supplier in Beijing and the leading wind power operator in China. On 6 July, it announced a possible privatisation bid from Beijing Energy Holding through a conditional voluntary cash general offer. Beijing Energy Holding and concert parties have a combined 71.40% stake (100% of domestic shares and 16.7% of H-shares). This potential privatisation joins a list of recent SOE privatisations of clean energy companies – Huadian Fuxin Energy Corp (816 HK),  Huaneng Renewables Corp H (958 HK) and CP Clean Energy and the potential privatisation of CGN New Energy Holdings (1811 HK).

2. Beijing Jingneng (579 HK): The Latest Clean Energy Privatisation?

Beijing Jingneng Clean Energy (579 HK), an SOE utility, was suspended Friday morning pursuant to the Code on Takeovers and Mergers. Should an Offer be tabled, this would be the fourth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in a little over a year – and sixth in which interested parties have been circling:

3. (Mostly) Asia M&A: June 2020 Roundup

4. GULF: Upside from Investment in INTUCH

We revise up our target price to Bt45.4 (from previous Bt44.6)  incorporating the contribution of Bt0.9/sh from new investment in INTUCH. Our valuation is derived from sum-of-the-parts (SOTP) methodology, implying a 78x PE’21.

Story:

• Positive view on GULF’s investment in INTUCH considering the short term value accretive investment strategy.
• Upside of 0.9/sh from acquisition of 4.6% stake in INTUCH.

5. China Gas Holdings (384 HK): Key Takeaways from Post-Result Investor Call

China Gas Holdings (384 HK) reported a marginally behind result with a 11.7% increase in reported profit to HK$9.19bn, primarily due to the negative impact of the COVID-19 on gas sales growth. Full-year DPS of HK$0.50 represents a 27.6% payout ratio.

In terms of outlook, the company guided for good gas volume recovery in Apr-Jun, expansion of dollar margin, improvement in receivable recovery and LPG micro pipeline network as key initiative in FY20/21. However, our concerns are continued high gearing, downtrend on connection fees, possibly slow receivable recovery and uncertainties on LPG micro pipeline.

Despite undemanding valuations (12x PER and 3.3x P/B), we still prefer our top two picks as analysed in China Infrastructure Deep Dive: Gas Utilities H & A Shares – ENN Energy (2688 HK) and China Resources Gas (1193 HK). 

In this briefing:

1. Quiddity M&A: Australia Foreign Investment Reforms
2. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets

1. Quiddity M&A: Australia Foreign Investment Reforms

On the 5 June 2020, the Treasury of the Australian Government released a 34-page document titled Foreign investment reforms, outlining the “most comprehensive” reform to Australian foreign investment review framework since the Foreign Acquisition and Takeovers Act (FATA) was introduced in 1975.

The new powers afforded the government – a draft legislation for consultation will be released next month –  will primarily address:

• A new national security test that will require foreign investors (government or private), to inform the Foreign Investment Review Board (FIRB) if they are preparing to acquire a direct interest in a “sensitive national security business.”
• Streamlining the approval processes for certain privately controlled institutional investment funds that hold purely passive foreign government funds, alongside private capital in non-sensitive sectors.
• Stronger penalties and enforcement powers to ensure greater compliance.

Further comments below the fold …

2. Infratil Placement – Better Balance Sheet Flexibility with Focus on Existing Assets

Infratil Ltd (IFT NZ) is looking to raise US$197m (A$300m) in its fully underwritten institutional placement to strengthen its balance sheet.

In this note, we will look at the placement details, impact of the equity raise, and pipeline assets. We will also run the deal through our framework.