China / Hong Kong Company Guide
China Resources Gas
Version 1 | Bloomberg: 1193 HK EQUITY | Reuters: 1193.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 11 May 2018
FULLY VALUED (Initiate coverage) Losing Steam Last Traded Price ( 10 May 2018):HK$28.25 (HSI : 30,809) Dollar margin remain under pressure from lack of Price Target 12-mth: HK$25.00 (-12% downside) midstream facilities and government regulation
A nalyst Conservative development strategy hinders growth Tony WU CFA +852 2971 1708 potential [email protected] Patricia YEUNG +852 2863 8908 Diminishing SOE advantage [email protected] Initiate with FULLY VALUED, TP is set at HK$25 Price Relative Not the time to be optimistic on margin yet. In contrary to HK$ Relative Index
33.1 market’s expectation on a rebound in dollar margin, we believe 206 31.1 the dollar margin for CR Gas could remain suppressed and decline 29.1 186 27.1 166 by Rmb0.03/m3 in the next two years. The market has 25.1 146 23.1 underestimated the severity of winter gas supply shortage, and 126 21.1 106 CR Gas will suffer in dollar margin due to the lack of midstream 19.1 17.1 86 facilities. It also has high exposure to regions with higher pressure 15.1 66 May-14 May-15 May-16 May-17 May-18 on dollar margin coming from government’s regulation on distribution margin. Moreover, conservative development strategy China Resources Gas (LHS) Relative HSI (RHS) towards integrated energy and rural coal to gas projects could Forecasts and Valuation FY Dec (HK$ m) 2017A 2018F 2019F 2020F hinder its growth potential. Turnover 39,838 46,481 51,630 56,505 Where w e differ. We are conservative on the outlook on the EBITDA 8,509 9,336 10,116 11,119 Pre-tax Profit 6,613 7,389 7,932 8,605 dollar margin of CR Gas. The market is too optimistic on the Net Profit 3,654 4,020 4,261 4,607 recovery of dollar margin. Thus, our earnings forecast is 7% lower Net Pft (Pre Ex) (core profit) 3,654 4,020 4,261 4,607 than the market. EPS (HK$) 1.68 1.85 1.92 2.07 Core EPS (HK$) 1.68 1.85 1.92 2.07 Potential catalyst. Continued gas shortage during winter and the EPS Gth (%) 11.0 9.9 3.8 8.1 full implementation of the distribution return requirement by local Core EPS Gth (%) 11.0 9.9 3.8 8.1 Diluted EPS (HK$) 1.68 1.85 1.92 2.07 governments, may trigger pressure on dollar margin and negative DPS (HK$) 0.56 0.68 0.77 0.83 sentiment on the stock. BV Per Share (HK$) 10.11 11.26 12.18 13.42 PE (X) 16.8 15.3 14.7 13.6 Valuation: Core PE (X) 16.8 15.3 14.7 13.6 We initiate with FULLY VALUED rating and target price is set at P/Cash Flow (X) 7.9 9.9 8.4 7.9 HK$25, based on DCF valuation. We have assumed a beta of 1 P/Free CF (X) 18.2 nm nm 64.4 EV/EBITDA (X) 8.2 7.8 7.4 6.7 with WACC of 8.5% and 1% terminal growth. Net Div Yield (%) 2.0 2.4 2.7 2.9 Key Risks to Our View: P/Book Value (X) 2.8 2.5 2.3 2.1 Upside risk on dollar margin. A less severe winter gas shortage or Net Debt/Equity (X) 0.0 0.1 0.0 0.0 ROAE (%) 18.4 17.3 16.5 16.2 lower than expected dollar margin pressure on project return investigation from government will be positive to earnings growth Consensus EPS (HK$) 1.88 2.07 2.43 Other Broker Recs: B:15 S:2 H:8 At A Glance Issued Capital (m shrs) 2,224 ICB Industry: Utilities Mkt. Cap (HK$m/US$m) 63,161 / 8,046 ICB Sector: Gas, Water & Multiutilities Major Shareholders Principal Business: Investment, construction and operation of city gas projects CR Company Limited (%) 63.9 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Capital Group Compan (%) 7.9 Free Float (%) 28.2 3m Avg. Daily Val. (US$m) 9.6
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China /Hong Kong Company Guide China Resources Gas
Table of Contents
SWOT Analysis 3 Valuation 4 Solid and steady gas distributor 6 Careful of the hiccups ahead 8 Financial Analysis 11 Key Risks 12 Appendix 13 A lucrative industry with bright prospects 14
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China/Hong Kong Company Guide China Resources Gas
SWOT Analysis
Strengths Weak nesses
Backed by one of the largest conglomerates in China Slower earnings growth on lack of new business initiatives Steady gas volume growth with higher proportion of residential and commercial gas volume Higher sensitivity to decline in dollar margin Solid balance sheet Lack of midstream facilities such as storage and LNG receiving terminal
Opportunities T hreats
Cut in city-gate price from lowering intra-provincial pipeline Gas supply shortage during winter season tariff Local government lowering dollar margin while Acceleration in the replacement of coal with gas implementing ROA requirement
Source: DBS Vickers
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China /Hong Kong Company Guide China Resources Gas
Valuation
Initiate with FULLY VALUED. Given CR Gas’s leading position in CR Gas is currently trading at the five-year mean and it has the gas distribution industry, we reckon the company will be been trading at a 24% premium against other listed peers in one of the major beneficiaries from accelerating gas the past three years due to its strong SOE background. consumption in China. However, it is more prone to potential However, we believe the valuation will be suppressed by the downward pressure on dollar margin, which will negatively pressure over dollar margin and lack of new growth drivers. impact earnings growth. We estimate CR Gas to achieve a After the recent share price hike of >15%, we believe the FY17-20 earnings CAGR of 8%, which is less exciting than current share price is fully valued. major peers. Our estimation is also lower than the market projection by 7%. We initiate coverage with a FULLY VALUED PE chart – Main gas distributors rating with TP set at HK$25. X The stock dropped c.25% from the peak in January this year 35 over concerns on the decline of dollar margin from elevated 30 LNG price last winter. Despite that the stock rebounded >15% 25 afterwards, we believe the market were too optimistic on the 20 recovery in dollar margin. We expect the dollar margin continue to drop c.Rmb0.03/m3 by 2019 from the implementation of 15 ROA requirement on local level. CR Gas has the highest number 10 of projects in provincial capitals/direct-controlled municipalities 5 and high exposure to high risks regions, which are prone to a 0
cut in dollar margin. Also, the company has the high earnings
Jul-15
Jul-16
Jul-17
Jan-15
Jan-16
Jan-17
Jan-18
Oct-15
Oct-16
Oct-17
Apr-15
Apr-16 Apr-17 sensitivity in a dollar margin cut. Therefore, we believe a miss on Apr-18 dollar margin estimate will negatively impact earnings growth CR Gas China Gas and share price. ENN Towngas China BEH
Source: Thomson Reuters, DBS Vickers
PE band chart PB band chart
Share Price (HK$) Share Price (HK$) 40 45 20x 3.5x 35 40 18x 3.2x 35 30 16x 2.8x 2.5x 14x 30 25 2.1x 12x 25 20 20 15 15
10 10
Jan-15
Jan-15
Sep-15 Apr-18
Dec-16
Mar-16
Aug-17
Aug-18 May-16 May-17 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
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China/Hong Kong Company Guide China Resources Gas
Peers PE vs EPS growth
PE 20 China Gas 18 ENN 16 CR Gas 14 Towngas 12 10 Kunlun 8 6 Tian Lun BEH Gas 4 2 0 0% 5% 10% 15% 20% 25% FY18-20 earnings growth
Source: Thomson Reuters, DBS Vickers
Peers valuation
Mk t PE PE Yield Yield P/Bk P/Bk EV/EBITDA ROE ROE Price Cap F iscal 18F 19F 18F 19F 18F 19F 18F 19F 18F 19F Company Name Code Local$ US$m Yr x x % % x x x x % % China Gas Holdings*# 384 HK 29.2 18,560 Mar 17.9 15.7 1.6 1.9 4.7 3.9 12.7 11.1 29.0 27.1 Enn Energy Holdings* 2688 HK 75.25 10,442 Dec 17.4 14.5 2.1 2.3 3.4 2.9 8.8 7.8 20.7 21.5 China Resources Gas Group 1193 HK 28.25 8,038 Dec 15.0 13.6 2.3 2.6 2.5 2.2 7.6 6.9 17.7 17.5 Towngas China 1083 HK 7.36 2,607 Dec 14.3 12.9 2.2 2.5 1.2 1.1 9.8 8.9 8.8 9.0 Beijing Enterprises Holdings 392 HK 40.1 6,474 Dec 7.0 6.4 2.7 2.9 0.7 0.6 11.0 10.6 10.3 10.4 Kunlun Energy 135 HK 6.89 7,115 Dec 9.5 8.4 3.7 4.1 1.1 1.0 5.1 4.6 11.5 12.2 China Tian Lun Gas Hdg. 1600 HK 5.4 684 Dec 9.2 7.8 3.0 3.8 1.4 1.3 n.a. n.a. 15.7 16.0 Source: Thomson Reuters, *DBS Vickers
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China /Hong Kong Company Guide China Resources Gas
Solid and steady gas distributor China Resources Company (CRC), one of the largest state- owned conglomerates in China, is the parent company of CR T he giant of natural gas distribution. CR Gas is one of the Gas with 64% stake as at end of 2017. CR Gas has access and largest downstream gas distributor in China in terms of gas relationships with various levels of governments by leveraging sales volume. Its principal businesses include piped gas on its SOE background, and it has demonstrated strong project distribution, natural gas filling station operations and sales of acquisition capability over the past years. It has also maintained gas appliances. During FY17, its total gas sales volume good bonds with state-owned upstream suppliers. amounted to 19.7bn m³, compared to 19.6bn m³ and 8.4bn m³ for ENN and Towngas China respectively.
Main Businesses
Source: Company
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China/Hong Kong Company Guide China Resources Gas
CR Gas was listed in 2008 with the injection of seven gas CR Gas’ volume exposure to residential customers account for projects and its portfolio has grown to a total of 238 gas 22% of total gas sales, which is high compared to major peers. projects covering 22 provinces and 73 prefecture level cities. Since C&I customers is expected to have higher volume growth The gas sales volume grew from 1.4bn m³ in 2008 to 19.7bn m³ from coal-to-gas conversion, this implies that CR Gas will enjoy in 2017, representing a robust CAGR of 34%. less growth benefit relatively.
F lipside of large and prosperous. CR Gas’s project profile is Total projects characterised by two words, large and prosperous, but we believe it has its flip side. CR Gas obtained the highest number m m3 # projects of large city projects in the industry for the past years, including 14 provincial capital projects and three direct-controlled 25,000 250 municipalities. In addition, most of its projects are located in the 20,000 200 eastern part of China with better economic activities, resulting in higher-than-average demand growth. This is seen from the 15,000 150 consistent outperformance of sales volume growth over the past years. 10,000 100
Sales volume growth vs industry growth 5,000 50
0 0 70%
60% Volume (m m3) # projects 50% Source: Company, DBS Vickers 40%
30% Gas volume mix excluding wholesale
20% 100% 10% 90% 80% 0% 70% F15 F16 F17 FY18 FY19 FY20 60% CR Gas ENN China Gas Industry 50%
Source: CEIC, Company 40% 30% However, CR Gas will enjoy less benefit from the coal-to-gas 20% 10% conversion initiative in China. Its exposure to Pan Beijing-Tianjin- 0% Hebei region is lower than its major peers and there are less CR Gas ENN China Gas Towngas room for coal-to-gas conversion in developed regions. This will China cause its volume growth to lack behind large peers such as ENN Residential C&I Gas station and China Gas. Source: Company, DBS Vickers Lower project exposure to high growth regions
China Gas ENN T owngas CR Gas Beijing 0 1 0 0 Tianjin 3 0 0 1 Hebei 41 20 6 7 Henan 20 11 0 12 Shandong 18 17 18 18 Shanxi 2 0 0 8 T otal 84 49 24 46 Source: Company
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China /Hong Kong Company Guide China Resources Gas
Careful of the hiccups ahead
Dollar margin under pressure. We believe CR Gas will continue We identified regions with higher pressure on dollar margin in to face pressure on dollar margin and market expectation on the next few years and CR Gas’ exposure in these regions is also dollar margin may be too optimistic. We estimate the dollar high. Regions with LNG supply and high dollar margin margin to decline from Rmb0.58/m3 in FY17 to Rmb0.55/m3 by level/selling price is expected to suffer higher dollar margin FY19. pressure. Regions with LNG receiving terminal and domestic We believe the supply for natural gas will continue to be tight in LNG production base will be more prone to risks in LNG direct the next two years and downstream distributors will potentially supply. Also, the provincial governments will have finalized the face pressure during winter peak season. During 2H16/1H17, gas distribution return regulatory documents before end of June the coal-to-gas conversion drove up the demand and price of and return investigation on local level will be conducted LNG. Despite in non-peak season, the current LNG price is still throughout the year. CR Gas has the most number of projects higher than the level during 2H16/1H17. In fact, it has increased located in provincial capitals, which usually are more mature 5-20% MTD in May due to tight pipeline gas supply. With coal- and have higher return. And regions with higher dollar margin to-gas conversion continues to drive demand, we expect the level will face more pressure on dollar margin as volume LNG price will remain elevated and gas supply will remain tight improves. in the winters of 2018/2019, although the severe gas shortage of last winter may not repeat again.
In addition, while increase gas storage capacity is an effective mean of alleviating gas storage, downstream distributors have different opinions on this and some of them lacks motivation to construct storage facilities until detailed return policy is issued, according to our channel checks. Unlike ENN and Towngas China, which will have LNG receiving terminals access and underground gas storage facilities beginning in 2018, CR Gas currently lacks midstream facilities. Therefore, CR Gas is less equipped to mitigate dollar margin pressure during winter peak season if severe gas shortage occurs again.
LNG price remains strong after winter peak season
RMB/m3 8,000
7,000
6,000
5,000
4,000
3,000
2,000 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Source: Wind, SCI99, DBS Vickers
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China/Hong Kong Company Guide China Resources Gas
Dollar margin risk analysis
Major A v erage Non-residential Implied dollar High High Domestic With LNG natural gas industrial selling city gate price margin level dollar end LNG receiv ing production Prov ince price (Rmb/ m3) (Rmb/ m3) (Rmb / m3) margin price production terminals base Risk lev el Fujian 4.20 1.65 2.55 Yes Yes Yes High Zhejiang 3.85 2.07 1.78 Yes Yes Yes High Liaoning 3.50 1.88 1.62 Yes Yes Yes High Shandong 3.40 1.88 1.52 Yes Yes Yes Yes High Jiangsu 3.25 2.06 1.19 Yes Yes Yes High Hainan 4.33 1.54 2.79 Yes Yes Yes High Guangdong 4.63 2.08 2.55 Yes Yes Yes High Shanghai 3.57 2.08 1.49 Yes Yes Yes High Guangxi 4.19 1.91 2.28 Yes Yes Yes High Shanxi 3.20 1.81 1.39 Yes Yes Yes High Jiangxi 3.39 1.86 1.53 Yes Yes Medium Heilongjiang 3.80 1.66 2.14 Yes Yes Medium Yunnan 3.42 1.61 1.81 Yes Yes Medium Anhui 3.25 1.99 1.26 Yes Medium Hunan 3.43 1.86 1.57 Yes Yes Medium Hebei 2.99 1.80 1.19 Yes Yes Medium Tianjin 2.77 1.90 0.87 Yes Medium Jilin 3.15 1.66 1.49 Yes Medium Sichuan 3.25 1.55 1.70 Yes Yes Yes ** Low Hubei 2.95 1.86 1.09 Yes Low Henan 2.89 1.91 0.98 Low Qinghai 1.81 1.17 0.64 ** Low Guizhou 2.98 1.61 1.37 Low Xinjiang 2.39 1.05 1.34 Yes ** Low Beijing 3.16 1.90 1.26 Low Shaanxi 2.30 1.24 1.06 Yes ** Low Inner Mongolia 2.25 1.24 1.01 Yes Low Chongqing 2.32 1.54 0.78 Low Gansu 1.99 1.33 0.66 Low Source: Wind, DBS Vickers
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China /Hong Kong Company Guide China Resources Gas
Exposure to high risk regions Number of new projects
70% No. of Project 90 60% 80
50% 70 60 40% 50 30% 40
20% 30 20 10% 10 0% 0 China Gas ENN Towngas CR Gas FY12 FY13 FY14 FY15 FY16 FY17
Source: Company, DBS Vickers Source: Company, DBS Vickers
Lack of additional growth driver. The company will be focusing CR Gas had strong momentum in project acquisition over the in city gas project development. Our perception is that the past decade by utilising its solid SOE background. Its development strategy is rather conservative, which hinders its connectable household reached 62.9m by the end of FY17, the ability to tab into new opportunities and miss out the earnings highest in the industry. It also obtained the highest number of growth potential. China Gas has started to aggressively expand large city projects over the past years. However, the number of into rural coal-to-gas conversion projects early and achieved gas project concessions are getting scarce on the market as strong growth in earnings. ENN and Towngas China on the seen by the lower number of new projects obtained by gas other hand, has aggressive target in the development of distributors. There would be fewer new concessions and more integrated energy projects. We believe investors would favour M&A activities for gas distributors, which are less relied on companies that can leverage on its existing business to seek relationship with local governments. Therefore, the SOE new growth drivers. advantage for CR Gas is diminishing and the valuation premium Steady growth, but losing the SOE advantage. As the leading will continue to narrow. downstream gas distributor in China, CR Gas will benefit from favourable government policies to increase gas consumption in
China by leveraging on its existing project base. However, we believe its SOE background advantage is diminishing with fewer medium-large project concessions available on the market.
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China/Hong Kong Company Guide China Resources Gas
Financial Analysis 2016 residential penetration and connectable population
We estimate its earnings to achieve an FY17-20 CAGR of 8%, m which will be mainly attributable to gas sales volume growth 200 56% from the acceleration of coal-to-gas conversion and cut in gas 54% price. 150 52% The revenue contributions from gas distribution, new 50% connection and others (gas appliance sales and construction 100 48% services) will be at 75%, 21% and 4% respectively in FY18. 46% Revenue from gas distribution is expected to increase 20% and 50 44% 13% in FY18 and FY19 respectively. We believe the main 42% growth will come from the acceleration of coal-to-gas conversion and increase in penetration rate. The total sales 0 40% CR Gas ENN China Gas volume growth is expected to increase 17% and 14% for FY18 Connectable population (m) and FY19 respectively. Penetration rate (%)
The residential penetration rate of the company is only at 48%, Source: Company, DBS Vickers compared to mature markets’ 70%-80%. The new building construction is also expected to reach low-mid single digit Newly completed residential housing growth in the next 2 years, according to our China Property Team. This will support new connection growth. We assume the m m2 revenue from new connection to achieve mid-high single-digit 900 growth in the next few years. We estimate 2.3m and 2.5m of new households (consolidated) to be connected in FY18 and 800 FY19 respectively. 700
Revenue mix 600
500 HK$m 60,000 25% 400 50,000 20% 300 40,000 FY11 FY12 FY13 FY14 FY15 FY16 FY17 15% 30,000 Source: CREIS 10% 20,000 Consolidated new connection 5% 10,000 m m3 # projects 25,000 250 0 0% FY15 FY16 FY17 FY18 FY19 FY20 Gas sales New connection 20,000 200 Others y-o-y growth
15,000 150 Source: Company, DBS Vickers 10,000 100
5,000 50
0 0
Volume (m m3) # projects
Source: Company, DBS Vickers
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China /Hong Kong Company Guide China Resources Gas
The GPM of the group is expected to decline from 29.9% in Opex-to-sales ratio FY17 to 27% in FY20 on lower connection margin and gas sales dollar margin. The gas sales dollar margin declined from 12% Rmb0.71/m³ in FY16 to Rmb0.58/m³ during FY17, which is mainly attributed to the more severe winter gas shortage and 10% delay in pass through of higher gas supply costs. We expect the dollar margin to continue declining to Rmb0.55/m³ by FY19 to 8% reflect impact from implementation of ROA regulation and lack 6% of midstream facilities. The GPM for new connection is expected to drop slightly by 40bps to c.57.5% in FY18 to take into 4% account potential discounts for connecting new coal-to-gas customers. 2%
0% Dollar margin FY15 FY16 FY17 FY18 FY19 FY20 Selling expenses Admin expenses
Rmb/m3 0.75 Source: Company, DBS Vickers
0.70 Key Risks to our call 0.65 Recovery in dollar margin. CR Gas has a higher earnings sensitivity to an increase/decrease in dollar margin. Higher-than- 0.60 expected dollar margin from lack of winter gas shortage, faster pass through in gas supply cost hike and less competition from 0.55 LNG would be positive to dollar margin and earnings growth High growth in sales volume. Faster implementation of coal-to- 0.50 gas conversion, higher oil price, and strong growth in industrial FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 activities will boost volume and earnings growth. Source: Company, DBS Vickers .
The operating expenses-to-sales ratio is expected to gradually decline on increasing economies of scale. We expect selling and administrative expenses-to-sales ratio to drop 2.7ppts to 14.6% in FY20. The balance sheet is expected to improve on the back of decent earnings growth. We factor in capital expenditure of HK$8bn in our model for FY18, of which 75% will be used for organic expansion and maintenance, while the rest will be utilised for M&A. We forecast the dividend payout ratio to reach 60% over the medium term as it is expected to be near net cash position by FY20.
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China/Hong Kong Company Guide China Resources Gas
Appendix
Key Management Team
Manager A ge A p pointment Previous experience Mr. Wang 54 ED & Mr. Wang is currently a Deputy General Manager of China Resources Company Limited. He joined Chuandong Chairman China Resources Petrochems Company Limited in 1985. He has over 25 years of corporate management experience in the area of petroleum and related products trading and distribution
Mr. Shi 52 ED & CEO Mr. Shi is currently the Assistant General Manager of China Resources Company Limited. He joined Shanbo the company in 1991 and was a Non-executive Director of China Resources Beer Company Limited, China Resources Land Limited and China Resources Power Holdings Company, and Vice Chairman and General Manager of China Resources Cement Holdings Limited.
Mr. Ge Bin 54 ED & Vice Mr. Ge is responsible for customer service and gas business of Greater Area of Shanghai, Jiangsu, Chairman Fujian, Hunan and Hubei. He joined China Resources Company Limited in 1996. He has been with CR Gas since 2007 and held former positions as Assistant General Manager, Deputy General Manager, Senior VP.
Source: Company, DBS Vickers
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China /Hong Kong Company Guide China Resources Gas
A lucrative industry with bright prospects China natural gas consumption mix
Natural gas is greatly supported by the Chinese government as Construction Wholesale, a type of fossil fuel that burns cleaner than oil or coal. The 0% Transport, Retail and Storage & Catering Na government is currently reducing coal consumption and Telecom 3% increasing clean energy consumption in an attempt to improve 12% the environment. China targets to increase the energy consumption proportion for natural gas from 5.9% in 2015 to Residential 19% 10% in 2020 and 15% in 2030. By the end of 2017, the natural gas consumption increased 15% to 237.3bn. In order to reach the government’s target, we expect the natural gas Other 3 consumption to reach above 340bn m by 2020, representing a Industrial Consumption CAGR of 14% from 2016-2020. 64% 2%
China natural gas consumption
Source: CEIC m m3 35,000 50% Average operating heat rate 30,000 40% 30% 25,000 Btu/ kwh 20% 20,000 12,000 10% 15,000 11,000 0% 10,000 -10% 10,000 5,000 -20% 9,000 0 -30%
8,000
15 16 17
14 15 16 17
11 12 12 13 13 14 15 16 17
- - -
- - - -
------
7,000
Oct Apr Oct Apr Oct Oct Oct Oct Oct
Jun Jun Jun
Mar Feb Feb Feb 6,000 Mid Price (m m3) (LHS) y-o-y % (RHS)
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 2015 Source: CEIC Coal Petroleum Natural Gas
Source: EIA The natural gas consumption volume is highly dependent on industrial users, which in turn is correlated to underlying Natural gas enjoys higher efficiency and lower carbon dioxide economic growth and the implementation of coal-to-gas (CO2)/ nitrogen oxide (NO) / sulfur dioxide (SO2) emission conversion. Approximately 64% and 19% of the natural gas compared to some of the traditional fossil fuels. Natural gas was consumed by industrial and residential users respectively. emits 50%/ 80%/99% less CO2/ NO/SO2 than coal, and For residential gas usage, it is mainly driven by the increasing 30%/80%/99% less than oil. Natural gas power plants operate penetration into existing residential buildings and construction at c.25% lower heat rate (more efficient) than coal and of new residential buildings. petroleum power plants
Thanks to the improved economic growth in China, natural gas Current city-gate pricing mechanism. The pricing mechanism consumption growth rebounded in 1H17, reaching 15.2%. We for natural gas has seen several changes over the past years expect the gas sales growth to continue as the government and it is heading towards the direction of market-oriented tightens natural gas policy enforcement in order to reach its pricing. Prior to 1993, the ex-factory gas price was set by the natural gas consumption target. government. Since then, natural gas price has gradually adopted government-guided pricing, which implies greater price flexibility. At the current stage, the “market netback” pricing method is adopted, where a maximum city-gate price is set by the NDRC, and the price is pegged to the alternative energy price. Page 14
China/Hong Kong Company Guide China Resources Gas
Natural gas price setting policies
Date Policy Policy details Before Cost plus pricing method (Natural gas price set by 2011 government and facilitated by market. Price is determined at reasonable margin on top of production cost. ) Dec-11 Market net back pricing method. Link city gate market Trial in Guangdong and Guangxi price with alternative fuels Jul-13 Market net back pricing method. Separate existing gas Seeks to adjust price of incremental gas to a fair level volume and incremental gas volume. Link incremental gas comparable to alternative energy’s price. For non-residential price with alternative fuels. use, price will increase RMB 0.4/m³. Price for gas used to produce fertilizers will merge and increase by RMB 0.25/m³. Price for residential users will remain unchanged. Sep-14 Market net back pricing method. Narrow price down Price for incremental gas remains unchanged. Non-residential differences between existing and incremental gas. users' existing gas price increase RMB 0.4/ m³. Price for gas used to produce fertilizers and residential users remain unchanged. Apr-15 Market net back pricing method. Merge existing and Non-residential users incremental gas decrease by RMB 0.44/ incremental gas. m³. Existing gas increase RMB 0.04/ m³. Price for gas used to produce fertilizers increase by less than RMB 0.2/ m³ to a suitable level. Price for residential users will remain unchanged. Nov-15 Market net back pricing method. Price for non-residential users decrease RMB 0.7/ m³. No price floor is set while the ceiling price can increase by 20% starting from 20 Nov 2016 Aug-17 Market net back pricing method. Price for non-residential users decrease RMB 0.1/ m³ Source: NDRC, DBS Vickers
The fluctuation in alternative fuel price has an impact on gas Alternative fuel price and natural gas price demand growth. We noticed that the price discount of natural gas price compared to alternative fuel price has widened, which (Rmb/mmbtu) is expected to lead to an acceleration in gas demand growth. 100 The price discounts of Shanghai city-gate price is 43% and 28% 80 to LPG, fuel oil and crude oil in March 2018, compared to 30% 60 and 14% in January 2017. 40 20
0
Jul-17
Jan-17
Jan-18
Jun-17
Oct-17
Feb-17
Feb-18
Apr-17
Sep-17
Dec-17
Nov-17
Mar-17
Mar-18
Aug-17 May-17 LPG Fuel Oil Crude Coal Shanghai city-gate price
Source: DBS Vickers
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China /Hong Kong Company Guide China Resources Gas
Share price performance vs HSI
01-Jan-10=1 2.5
2.0 Strong growth in gas consumption
1.5
Pick up in gas volume growth from 1.0 Collapse of oil prices coal-to-gas leads to lower price conversion and competitiveness for improvement in natural gas Concern on decline dollar margin in dollar margin 0.5 from tight gas supply
0.0
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17 Apr-18
CR Gas share price vs HSI (LHS)
Source: DBS Vickers
Dollar margin vs share price performance
01-Jan-10=1 RMB/M3 2.4 0.8
2.2 0.75 2.0 0.7 1.8 0.65 1.6 0.6 1.4
1.2 0.55
1.0 0.5
Jul-15
Jul-16
Jul-17
Jan-15
Jan-16
Jan-17
Jan-18
Sep-15
Sep-16
Sep-17
Nov-15
Nov-16
Nov-17
Mar-15
Mar-16
Mar-17
Mar-18
May-15
May-16
May-17 May-18
CR Gas share price vs HSI (LHS) Overall dollar margin (RHS)
Source: DBS Vickers
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China/Hong Kong Company Guide China Resources Gas
Total gas sales volume (m m3)
29269 29,562 26152 CRITICAL FACTORS TO WATCH 25,339 23019 21,116 19667 Critical Factors 16,893 16272 Squeeze in dollar margin to continue. CR Gas may face pressure 12,669 on dollar margin and market expectation on dollar margin is too 8,446 optimistic. The supply for natural gas is expected to remain tight 4,223 in the next two years and downstream distributors may 0 continue to face pressure during winter peak season. According 2016A 2017A 2018F 2019F 2020F to our channel checks, downstream distributors have different opinions on gas storage and some of them lacks motivation to New Residential connections (m) - consolidated construct storage facilities until detailed return policy is issued. 2.82 2.8 2.6 Unlike ENN and Towngas, which will have LNG receiving 2.3 terminals access and underground gas storage in 2018, CR Gas 2.26 2.1 1.8 currently lacks midstream facilities. Therefore, CR Gas is less 1.69 equipped to mitigate dollar margin pressure during winter peak season if severe gas shortage occurs again. 1.13
0.56 We also identified regions with higher pressure on dollar margin 0.00 in the next few years and CR Gas’ exposure in these regions is 2016A 2017A 2018F 2019F 2020F also high. The provincial governments will finalise the gas distribution return regulatory documents before end of June Blended dollar margin (Rmb/m3) and return analysis on local level will be conducted throughout 0.72 0.71 the year. CR Gas has the most number of projects located in 0.58 0.57 provincial capitals, which usually are more mature and have 0.58 0.55 0.53 higher return. And regions with higher dollar margin level will 0.43 face more pressure on dollar margin as volume expands. 0.29 Conservative development strategy. The company will be 0.14 focusing in city gas project development. Our perception is that its development strategy is rather conservative, which hinders its 0.00 ability to tab into new opportunities and miss out the earnings 2016A 2017A 2018F 2019F 2020F growth potential. China Gas has started to aggressively expand New connection - residential ASP into rural coal-to-gas conversion projects early and achieved 2,970 3,000 2,940 2,911 2,881 2,853 strong growth in earnings. ENN and Towngas China on the other hand, has aggressive target in the development of 2,400 integrated energy projects. We believe investors would favor 1,800 companies that can leverage on its existing business to seek new growth drivers. 1,200
600
Steady volume growth. The acceleration of coal-to-gas 0 conversion, speed up of the construction of natural gas 2016A 2017A 2018F 2019F 2020F infrastructure and cut in the short distance pipeline transmission fee will boost the sales volume growth for gas distributors. Source: Company, DBS Vickers Since CR Gas’ projects are located in eastern region with strong economic growth, its volume growth will outperform industry average. However, CR Gas will enjoy less benefit from the coal- to-gas conversion initiative in China due to lower exposure to Pan Beijing-Tianjin-Hebei region This will cause its volume growth to lack behind large peers such as ENN and China Gas.
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Leverage & Asset Turnover (x) Balance Sheet: 0.7 0.60 Close to net cash by end of FY20. The company has a solid 0.7 0.7 0.50 balance sheet from steady cash inflows each year. We factor in 0.6 capital expenditure of HK$8bn in our model for FY18, of which 0.40 0.6 0.6 75% will be used for organic expansion and maintenance while 0.30 0.6 the rest is used for M&A. We expect CR Gas to be close to net 0.20 0.6 cash position by FY20. 0.5 0.10 0.5 0.00 0.5 Share Price Drivers: 2016A 2017A 2018F 2019F 2020F Winter gas shortage. The supply for natural gas will remain tight Gross Debt to Equity (LHS) Asset Turnover (RHS) during peak season in winter due to insufficient gas storage and Capital Expenditure HK$m pipeline network in the country. Gas distributors with lack of 9,000.0 storage facilities and access to LNG receiving terminals will be 8,000.0 7,000.0 prone to dollar margin squeeze. 6,000.0 5,000.0 Government implementation of ROA requirement. The document 4,000.0 3,000.0 for return restriction for gas distributors will be issued by all 2,000.0 provinces before end of June, and investigation on project returns 1,000.0 0.0 will be conducted throughout the year. CR Gas has the most 2016A 2017A 2018F 2019F 2020F number of projects located in provincial capitals, which usually are Capital Expenditure (-) more mature and have higher return. And regions with higher ROE
dollar margin level will face more pressure on dollar margin as 18.0% volume improves. 16.0% 14.0% Key Risks: 12.0% 10.0% Upside risk on dollar margin. A less severe winter gas shortage or 8.0%
lower than expected dollar margin cut on project return 6.0% investigation from government will be positive to earnings growth 4.0% 2.0% Company Background: 0.0% 2016A 2017A 2018F 2019F 2020F CR Gas is the largest downstream gas distributor in China in Forward PE Band terms of gas sales volume. Its principal businesses are in piped gas (x)
distribution, natural gas filling station operations and sale of gas 22.4 appliances. By the end of FY17, its gas sales volume had grown 20.4 21% y-o-y to 19.7bn m³. +2sd: 19.2x 18.4 +1sd: 17.3x 16.4 Avg: 15.5x 14.4 -1sd: 13.7x 12.4 -2sd: 11.8x 10.4 May-14 May-15 May-16 May-17
PB Band (x)
3.9
3.4 +2sd: 3.36x +1sd: 3.11x 2.9 Avg: 2.86x -1sd: 2.62x 2.4 -2sd: 2.37x
1.9 Dec-14 Dec-15 Dec-16 Dec-17
Source: Company, DBS Vickers
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Key Assumptions FY Dec 2015A 2016A 2017A 2018F 2019F 2020F
Total gas sales volume (m 14,121.0 16,272.0 19,667.0 23,019.0 26,151.6 29,269.3 m3) New Residential connections (m) - 1.5 1.8 2.1 2.3 2.6 2.8 consolidated
Blended dollar margin 0.71 0.71 0.58 0.57 0.55 0.53 (Rmb/m3) New connection - 2,990.0 2,970.0 2,940.0 2,910.6 2,881.5 2,852.7 residential ASP Source: Company, DBS Vickers
Segmental Breakdown (HK$ m)
FY Dec 2015A 2016A 2017A 2018F 2019F 2020F R e venues (HK$ m) Sale & distribution of gas 24,227 23,872 29,082 34,975 39,476 43,724 fuelGas & connection related products 6,869 7,439 8,927 9,579 10,153 10,724 Others 1,738 1,606 1,829 1,927 2,001 2,058 T otal 32, 834 32, 916 39, 838 46, 481 51, 630 56, 505 GPM (HK$ m) Sale & distribution of gas 5,742 6,493 6,427 7,393 8,104 8,740 fuelGas & connection related products 4,108 4,448 5,169 5,508 5,838 6,166 Others 150 243 320 337 350 360 T otal 9, 999 11, 184 11, 916 13, 238 14, 292 15, 266 GPM Margins (%) Sale & distribution of gas 23.7 27.2 22.1 21.1 20.5 20.0 fuelGas & connection related products 59.8 59.8 57.9 57.5 57.5 57.5 Others 8.6 15.1 17.5 17.5 17.5 17.5 T otal 30. 5 34. 0 29. 9 28. 5 27. 7 27. 0 Source: Company, DBS Vickers
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Income Statement (HK$ m) FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Revenue 32,834 32,916 39,838 46,481 51,630 56,505 Cost of Goods Sold (22,835) (21,732) (27,922) (33,243) (37,339) (41,239) Gross Profit 9, 999 11, 184 11, 916 13, 238 14, 292 15, 266 Other Opng (Exp)/Inc (5,790) (5,877) (6,301) (7,112) (7,745) (8,250) O pe rating Profit 4, 209 5, 307 5, 614 6, 126 6, 547 7, 017 Other Non Opg (Exp)/Inc 393 424 464 594 490 616 Associates & JV Inc 961 772 787 837 929 1,017 Net Interest (Exp)/Inc (252) (315) (253) (168) (35) (45) Pre -tax Profit 5, 311 6, 189 6, 613 7, 389 7, 932 8, 605 Tax (1,508) (1,751) (1,703) (1,902) (2,042) (2,215) Minority Interest (965) (1,148) (1,257) (1,466) (1,629) (1,783) Ne t Profit 2, 838 3, 289 3, 654 4, 020 4, 261 4, 607 Net Profit before Except. 2,838 3,289 3,654 4,020 4,261 4,607 EBITDA 6,604 7,788 8,509 9,336 10,116 11,119 Growth Revenue Gth (%) 14.3 0.3 21.0 16.7 11.1 9.4 EBITDA Gth (%) 10.1 17.9 9.2 9.7 8.4 9.9 Opg Profit Gth (%) 18.4 26.1 5.8 9.1 6.9 7.2 Net Profit Gth (%) 14.4 15.9 11.1 10.0 6.0 8.1 M a rgins & Ratio Gross Margins (%) 30.5 34.0 29.9 28.5 27.7 27.0 Opg Profit Margin (%) 12.8 16.1 14.1 13.2 12.7 12.4 Net Profit Margin (%) 8.6 10.0 9.2 8.6 8.3 8.2 ROAE (%) 17.2 18.9 18.4 17.3 16.5 16.2 ROA (%) 4.8 5.5 5.7 5.6 5.5 5.5 ROCE (%) 7.9 10.0 10.5 10.5 10.5 10.7 Div Payout Ratio (%) 25.9 30.4 33.5 37.0 40.0 40.0 Net Interest Cover (x) 16.7 16.9 22.2 36.4 188.9 154.9 Source: Company, DBS Vickers
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China/Hong Kong Company Guide China Resources Gas
Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 22,717 24,059 28,608 34,910 40,338 44,943 Invts in Associates & JVs 11,947 10,892 13,046 13,154 13,274 13,406 Other LT Assets 4,882 4,754 4,337 4,598 4,785 4,962 Cash & ST Invts 10,751 9,525 10,356 7,564 7,100 5,728 Inventory 571 413 595 588 654 715 Debtors 7,369 8,021 9,463 10,199 11,329 12,399 Other Current Assets 1,660 2,011 2,359 2,753 3,058 3,347 T otal Assets 59, 896 59, 675 68, 764 73, 766 80, 538 85, 500
ST Debt 4,220 3,139 5,328 4,828 3,828 2,828 Creditors 20,609 21,737 26,050 28,447 31,951 35,289 Other Current Liab 594 540 634 739 821 899 LT Debt 10,679 9,028 6,039 5,039 5,039 3,039 Other LT Liabilities 1,306 1,526 1,544 1,544 1,544 1,544 Shareholder’s Equity 17,009 17,768 21,993 24,525 27,082 29,846 Minority Interests 5,478 5,937 7,177 8,643 10,272 12,055 T otal Cap. & Liab. 59, 896 59, 675 68, 764 73, 766 80, 538 85, 500
Non-Cash Wkg. Capital (11,604) (11,831) (14,266) (15,646) (17,732) (19,727) Net Cash/(Debt) (4,148) (2,642) (1,011) (2,303) (1,767) (139) Debtors Turn (avg days) 79.8 85.3 80.1 77.2 76.1 76.6 Creditors Turn (avg days) 340.0 378.0 331.9 316.1 313.2 316.5 Inventory Turn (avg days) 10.1 8.8 7.0 6.9 6.4 6.4 Asset Turnover (x) 0.6 0.6 0.6 0.7 0.7 0.7 Current Ratio (x) 0.8 0.8 0.7 0.6 0.6 0.6 Quick Ratio (x) 0.7 0.7 0.6 0.5 0.5 0.5 Net Debt/Equity (X) 0.2 0.1 0.0 0.1 0.0 0.0 Net Debt/Equity ex MI (X) 0.2 0.1 0.0 0.1 0.1 0.0 Capex to Debt (%) 23.9 27.2 38.8 81.1 84.6 119.3 Z-Score (X) NA NA NA NA NA NA
Source: Company, DBS Vickers
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Cash Flow Statement (HK$ m) FY Dec 2015A 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit 5,311 6,189 6,613 7,389 7,932 8,605 Dep. & Amort. 1,041 1,285 1,643 1,779 2,149 2,469 Tax Paid (1,294) (1,654) (1,700) (1,902) (2,042) (2,215) Assoc. & JV Inc/(loss) (961) (772) (787) (837) (929) (1,017) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 Chg in Wkg.Cap. 1,230 1,941 1,764 1,667 2,309 2,206 Other Operating CF 359 373 260 (1,860) (1,934) (2,071) Ne t Operating CF 5, 687 7, 362 7, 793 6, 236 7, 485 7, 976 Capital Exp.(net) (3,560) (3,314) (4,411) (8,000) (7,500) (7,000) Other Invts.(net) (671) (9) (5) 0 0 0 Invts in Assoc. & JV (435) (1) (529) 0 0 0 Div from Assoc & JV 418 582 685 728 809 885 Other Investing CF 3,465 (4,206) 4,050 (341) (265) (251) Ne t Investing CF ( 784) ( 6,948) ( 209) ( 7,613) ( 6,956) ( 6,365) Div Paid (652) (827) (980) (1,488) (1,704) (1,843) Chg in Gross Debt 3 (2,671) (923) (1,500) (1,000) (3,000) Capital Issues 0 0 0 0 0 0 Other Financing CF (731) (1,733) (1,254) 1,572 1,711 1,860 Ne t Financing CF ( 1,380) ( 5,232) ( 3,157) ( 1,415) ( 994) ( 2,982) Currency Adjustments (328) (435) 425 0 0 0 Chg in Cash 3,195 (5,253) 4,852 (2,792) (464) (1,372) Opg CFPS (HK$) 2.05 2.49 2.77 2.10 2.33 2.59 Free CFPS (HK$) 0.98 1.86 1.55 (0.81) (0.01) 0.44
Source: Company, DBS Vickers
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DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:
S TRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) B U Y (>15% total return over the next 12 months for small caps, >10% for large caps) H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FU LLY VALUED (negative total return i.e. > -10% over the next 12 months) S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 11 May 2018 09:34:52 (HKT) Dissemination Date: 11 May 2018 19:23:19 (HKT) Sources for all charts and tables are DBS Vickers unless otherwise specified.
GEN ERAL DISCLOSURE/DISCLAIMER
Th is report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated i n any form or by any means or (ii) redistributed without the prior written consent of DBSV HK.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research . Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contain ed in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, wh o should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communica tion given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, esti mates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will var y significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
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A N ALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that th e views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies tha t no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity wh o is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
C O MPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in China Gas Holdings Limited (384 HK), Enn Energy Holdings Limited (2688 HK), Beijing Enterprises Holdings Limited (392 HK) and Kunlun Energy Company Limited (135 HK) recommended in this report as of 09 May 2018.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. C o mpensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to e ffect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
4. D isclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step -child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or i nvestments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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R ESTRICTIONS ON DISTRIBUTION Ge neral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. A ustralia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946. DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
H o ng Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities. I ndonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR S ingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Th ailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. U nited This report is produced by DBSVHK which is regulated by the Hong Kong Securities and Futures Commission
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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, p hotocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. D u bai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3 rd Floor, I n ternational Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Fi nancial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for C entre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
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U nited Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Em irates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or c onsidered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. U nited States This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein shou ld contact DBSVUSA directly and not its affiliate. O ther In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, j urisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. D BS Vickers (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Company Regn. No. 31758
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D BS Regional Research Offices
H O NG KONG MA LAYSIA S INGAPORE D BS Vickers (Hong Kong) Ltd A llianceDBS Research Sdn Bhd D BS Bank Ltd C o ntact: Carol Wu C o ntact: Wong Ming Tek (128540 U) C o ntact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2863 1523 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong Ltd e-mail: [email protected] Company Regn. No. 196800306E
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