Monday, May 30, 2016
China Merchants Securities (HK) Co., Ltd. Company Report Hong Kong Equity Research
Anna YU Sinopec Kantons (934 HK) +852 6226 8956 Oil & gas logistics platform to thrive on volume growth [email protected] ■ Key beneficiary of robust China crude oil imports given its more than 50% market share in domestic crude oil jetty services market Initiation ■ Newly acquired natural gas pipeline to leverage on robust China natural gas consumption in the long run BUY ■ Valuation attractive. Initiate with BUY and TP of HK$5.14 Leverage on robust China crude oil imports Price HK$3.72 12-month Target Price We expect China crude oil imports to grow at solid 7% CAGR in 2015- HK$5.14 (+38%) 20E underpinned by lower domestic production, inventory build-up and (Potential up/downside) higher non-state crude oil import quota. Thanks to robust China crude oil imports, we expect the throughput volume in Sinopec Kantons’ 7 Price Performance domestic crude oil terminals to increase from 187mt in 2015 to 244mt in (%) 2018E, representing a CAGR of 9% during the period with overall 10 934 HSI Index utilization up from 69% in 2015 to 83% in 2018E. 0 Gas transmission volume to recover from low base -10 -20 The newly acquired Yu-Ji Pipeline reported a 7.8% YoY decline in -30 transmission volume to 3.0bcm in 2015, mainly due to 37% YoY plunge in -40 volume to Shandong given increased LNG imports in the area upon the -50 operation of Qingdao LNG terminal as at the end of 2014. We expect the -60 transmission volume to rebound by a moderate 12% YoY to 3.3bcm in May/15 Sep/15 Jan/16 Apr/16
2016E underpinned by increased natural gas demand upon the cut in Source: Bigdata city-gate gas price on November 2015. We expect overall transmission % 1m 6m 12m volume to grow at 9% CAGR in 2015-18E and reach 3.9bcm in 2018E. 934 HK (13.1) (12.9) (47.9) HSI (4.7) (9.3) (27.8) Solid 12% earnings CAGR in 2015-18E driven by pipeline We expect net profit to grow at 12% CAGR in 2015-18E underpinned by 9% earnings CAGR on crude oil jetty services business and 20% Oil and Gas earnings CAGR on natural gas pipeline transmission business. These Hang Seng Index 20577 core busiensses are expected to account for 72% and 31% of total profit HSCEI 8526 Key Data in 2018E versus 78% and 25% in 2015. Meanwhile, we expect improved 52-week range (HK$) 3.38-7.04 overseas logsitics business to be offset by increased interest expenses Market cap (HK$ mn) 9249 upon the completion of pipeline acuqisition. Our 2016E-17E earnings Avg. daily volume (mn) 3.33 projection is 4-5% higher than market consensus. BVPS (HK$) 3.77 P/E at significant discount to its peers Shareholding Structure We derive our target price of HK$5.14 based on sector P/B-ROE, which Sinopec 60.33% implies 2016E P/E of 10.4x or P/B of 1.2x. Sinopec Kantons is trading at National Council for Social Security Fund 5.99% 2016E P/E of 7.6x or P/B of 0.9x, both 53-62% discount to its gloal peers ICBC Credit Suisse Asset Management 5.9% No. of shares outstanding (mn) 2486 which we believe is attractive given its solid earnings growth outlook. Free float 48.44 Financials RMB mn 2014 2015 2016E 2017E 2018E
Revenue 20,670 2,044 2,246 2,350 2,463 Growth (%) -11.5% -90.1% 9.9% 4.6% 4.8% Net profit 1,018 1,027 1,223 1,342 1,440 Growth (%) 107.2% 0.9% 19.1% 9.7% 7.3% EPS (RMB) 0.41 0.41 0.49 0.54 0.58 DPS (RMB) 0.05 0.05 0.15 0.22 0.29 P/E (x) 9.1 9.0 7.6 6.9 6.4 P/B (x) 0.7 1.0 0.9 0.8 0.7 ROE (%) 9.1% 9.4% 12.3% 12.2% 12.1% Sources: Company data, CMS (HK) estimates
Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1 Monday, May 30, 2016
Investment thesis Leading petrochemical storage and logistics company in China Sinopec Kantons is the largest crude oil terminal operator in China underpinned by the support of its parent company, Sinopec, which injected 50% interests in Zhanjiang Port in 2011 and 50-90% interests in five other crude oil terminals in 2012. Sinopec Kantons currently owns and operates 7 crude oil terminals located in China coastline with a total of 35 berths and combined annual throughput capacity of 272.5mt. The actual throughput volume came in at 186.8mt in 2015, up 15% YoY and accounting for 56% of China crude oil imports during the period. Sinopec Kantons entered the natural gas transmission business in 2015 by acquiring 100% interests in Yu-Ji Pipeline from Sinopec which helped diversify its transmission and distribution business and underpin future earnings growth. For the overseas market, Sinopec Kantons have developed two storage projects: Vesta in Europe and FOT in Middle East. It also engages in the LNG shipping business and chartered oil vessel business.
Solid 12% earnings CAGR in 2015-18E driven by organic growth We expect Sinopec Kantons to be a key beneficiary of robust China crude oil imports and domestic natural gas consumption which are expected to grow at solid 7% CAGR and 14% CAGR in 2015-20E, respectively. We expect overall net profit to increase from HK$1,027mn in 2015 to HK$1,440mn in 2018E, representing a solid 12% CAGR during the period underpinned by capacity ramp-up. Our earnings projection does not include any possible further assets injections from Sinopec given the unceratinty for the timing of assets injections and limited financial information for unlisted assets. Meanwhile, we estimate the remaining four crude oil terminals owned by Sinopec would lift Sinopec Kantons’ domestic crude oil terminal capacity by 23% upon injection while the other key pipeline (Sichuan to East) operated and owned by Sinopec would help double Sinopec Kantons’ current transmission capacity upon injection.
BUY on solid return versus attractive valuation We use P/B versus ROE to value Sinopec Kantons, as we believe that this methodology would capture the return profile of the company. We select domestic port and city-gas distributors as its peer group and find that the stock is trading significantly below the sector average 2016E P/B multiple based on its 2016E ROE. We derive our target price of HK$5.14 based on sector P/B-ROE, which implies 2016E of P/E of 10.4x or P/B of 1.2x.
Catalysts and risks We believe that key catalysts include: 1) further injection of storage and logistics assets from Sinopec; 2) higher-than-expected crude oil imports; and 3) faster-than-expected recovery in domestic natural gas consumption. Meanwhile, we expect key risks to be 1) delay in capacity upgrade in Rizhao Port; 2) lower gas demand in Shandong due to increasing LNG imports; and 3) operation risks for overseas projects
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Focus charts Figure 1: Throughput volume to reach 244mt in 2018E Figure 2: Natural gas transmission volume to recover with capacity utilization up to 83% from low base in 2015
mt Throughput volume Capacity utilization % bcm Shaanxi Shanxi Henan/Hebei Shandong 260 100 4.0 240 80 220 3.0
200 60 2.0 180 40 160 1.0 20 140 0.0 120 - 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E
Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates
Figure 3: Net profit to grow at solid 12% CAGR in Figure 4: Robust gross cash underpins future increase 2015-18E in dividend
Crude oil jetty services NG pipeline HK$ mn Cash Net profit Dividend Overseas Others HK$ mn 3,000 Total net profit 1,600 2,500
1,200 2,000
800 1,500 1,000 400 500 0 0 (400) 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates
Figure 5: Sinopec Kantons is attractive based on P/B vs. ROE framework
Sources: Bloomberg, CMS (HK) estimates
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Contents Focus charts...... 3 Figure 1: Throughput volume to reach 244mt in 2018E with capacity utilization up to 83% ...... 3 Figure 2: Natural gas transmission volume to recover from low base in 2015 ...... 3 Figure 3: Net profit to grow at solid 12% CAGR in 2015-18E ...... 3 Figure 4: Robust gross cash underpins future increase in dividend...... 3 Figure 5: Sinopec Kantons is attractive based on P/B vs. ROE framework ...... 3 Leveraging on robust China crude oil imports ...... 6 Crude oil imports to grow at solid 7% CAGR in 2015-20E 6 Largest crude oil terminal operator in China to benefit from robust oil imports 10 Possible M&As support future expansion 13 Newly acquired pipeline assets to explore natural gas transmission business ...... 14 Acquisition completed in December 2015 with attractive valuation 14 Gas transmission volume to recover from low base in 2015 15 Limited risk on transmisson tariff cut given reasonable return 17 Large size of pipeline assets held by Sinopec to underpin future M&As 17 Ramp-up of overseas storage and logistics business ...... 18 Earnings to grow at solid 12% CAGR in 2015-18E ...... 19 Solid growth underpinned by current capacity ramp-up even without M&As 19 Consolidated revenue and cost only reflects part of businesses 19 Possible increase in dividend payout given robust cash on hand 20 Initiate with BUY and TP of HK$5.14 ...... 22 Appendix: Sinopec Kantons – Leading petrochemical storage and logistics company in China ...... 23 Investment Ratings ...... 29 Disclaimer ...... 29
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Figure 6: Valuation comparison Bloomberg Mark. P/E P/B ROE Dividend Yield Code Price Cap 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E LC USD mn x x x x % % % %
Sinopec Kantons* 934 HK 3.72 1,191 7.6 6.9 0.9 0.8 12.3 12.2 4.0 5.8 China Ports (H share)
China Merchants 144 HK 21.60 7,230 12.8 11.9 0.9 0.8 7.2 7.5 3.7 3.9 Dalian Port 2880 HK 3.19 3,685 27.2 29.0 0.9 0.9 3.2 3.1 1.1 1.5 COSCO Pacific 1199 HK 7.84 2,995 10.1 10.0 0.6 0.6 6.0 5.9 14.6 4.0 Tianjin Port 3382 HK 1.09 864 7.3 6.8 0.5 0.5 7.6 7.7 5.5 5.5 Xiamen Port 3378 HK 1.45 509 9.8 9.1 0.6 0.6 6.6 6.7 4.1 4.1 Average 3,057 13.4 13.4 0.7 0.7 6.1 6.2 5.8 3.8
China city-gas
Beijing Enterprises 392 HK 39.45 6,454 7.9 7.5 0.8 0.7 10.4 10.1 2.9 3.2 China Gas 384 HK 10.84 6,856 14.8 12.4 2.6 2.2 18.5 19.6 1.6 2.1 Kulun Energy 135 HK 6.26 6,508 12.9 10.1 0.9 0.9 8.0 8.6 1.8 2.4 CR Gas 1193 HK 21.55 6,173 14.0 12.6 2.4 2.1 17.8 17.3 1.7 2.0 ENN Energy 2688 HK 37.50 5,227 11.8 10.5 2.1 1.9 19.5 18.8 2.5 2.8 Towngas China 1083 HK 4.11 1,411 8.6 8.2 0.8 0.7 8.6 8.6 2.9 3.1 Average 5,438 11.7 10.2 1.6 1.4 13.8 13.8 2.2 2.6 China Ports (A share) Shanghai Port 600018 CH 5.07 17,907 17.0 16.4 1.9 1.7 10.8 10.8 3.1 3.3 Ningbo Port 601018 CH 5.41 10,554 25.4 25.0 2.0 1.9 7.8 7.5 1.2 1.2 Dalian Port 601880 CH 5.39 3,685 59.9 53.9 1.9 1.9 3.3 3.4 0.4 0.4 Tianjin Port 600717 CH 8.68 2,216 N/A N/A 0.9 0.9 8.8 8.9 2.8 2.9 Rizhao Port 600017 CH 4.13 1,936 31.5 27.0 1.2 1.2 2.8 3.2 N/A N/A Average 7,260 33.4 30.6 1.6 1.5 6.7 6.8 1.9 1.9
Global ports
DP World DPW DU 18.10 15,023 16.1 13.8 1.6 1.4 10.3 10.8 1.8 2.0 Adani Port ADSEZ IN 192.45 5,952 15.7 14.2 3.0 2.5 20.9 19.0 0.8 0.9 Hutchison Port HPHT SP 0.44 3,833 17.9 19.1 0.7 0.7 3.8 3.6 9.2 8.4 Intl Container Term Services ICT PM 58.50 2,551 18.7 16.7 1.9 1.9 10.9 11.7 1.5 1.6 Port of Tauranga POT NZ 19.35 1,774 33.9 30.1 3.0 2.9 8.7 9.7 2.6 2.8 Hamberger Hafen HHFA GR 14.97 1,217 19.9 16.4 2.0 1.9 10.3 12.5 3.8 4.1 Piraeus Port PZE GR 12.69 355 10.8 8.8 0.9 1.0 N/A N/A 11.8 5.4 Average 4,386 19.0 17.0 1.9 1.8 10.8 11.2 4.5 3.6
Global oil storage and logistics
Kinder Morgan KMI US 17.92 39,989 26.9 23.0 1.1 1.1 4.2 5.1 2.8 2.8 Magellan Mistream MMP US 70.08 15,963 20.2 18.5 7.6 7.5 38.7 39.4 4.7 5.1 Buckeye BPL US 72.81 9,487 17.8 16.9 2.6 2.6 14.8 N/A 6.7 7.0 Sunoco SXL US 28.09 8,306 31.8 19.0 1.0 1.0 3.3 5.2 7.1 7.7 Vopak VPK NA 47.25 6,750 17.4 17.4 2.5 2.3 17.4 13.5 2.3 2.4 NuStar NS US 48.66 3,790 21.3 19.7 2.6 2.9 11.3 N/A 9.0 9.0 Odfjell ODF NO 30.90 317 4.1 3.4 0.4 0.4 11.2 11.7 - - Horizon HNL CN 1.66 169 N/A N/A 0.7 0.7 (3.2) (1.1) 4.8 4.8 Average 10,597 19.9 16.9 2.3 2.3 12.2 12.3 4.7 4.9 *CMS (HK) estimates Sources: Bloomberg, CMS (HK) estimates
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Leveraging on robust China crude oil imports Crude oil imports to grow at solid 7% CAGR in 2015-20E China heavily relies on imports to satisfy the increasing domestic oil consumption given the lack of domestic oil resources. China oil reserves life came in at 11.9 years as at the end of 2014, far below the global average of 52.5 years. Meanwhile, China apparent crude oil consumption jumped from 222mt in 2000 to 547mt in 2015, representing a CAGR of 6.2%, of which net imports contributed around 84% of the inceased consumption during the period and accounted for 61% of total consumption in 2015. Despite slowdown in domestic economy, crude oil imports maintain robust with 4M16 imports up 11.8% YoY versus 8.8% growth in 2015, underpinned by lower domestic production, inventory build-up and higher non-state crude oil import quota. Amid plunge in oil prices, domestic oil producers reported significant losses for upstream exploration and produciton business in 1Q16. Three oil majors plan to cut upstream capex by a further 10-12% in 2016 after a significant 29-38% cut in 2015 with planned oil and gas production down 2-5% in 2016. The overall domestic crude oil produciton dropped 2.7% YoY in 4M16, the first decline since 2010. Based on our sensitive analysis, 5% drop in domestic production would boost imports by 3.4% assuming 4% increase in crude oil processing volume, which has not included any impact for inventory build-up. Figure 7: Imports as key contributor for increase in Figure 8: Crude oil imports surged ytd versus apparent crude oil consumption in 2000-15 weakened domestic production
mt Domestic production Net imports % Imports growth 600 15 Production growth
500 2000-15 CAGR: 6.2% 10 400 300 5 200 0 100 (5)
-
2M15 3M15 4M15 5M15 6M15 7M15 8M15 9M15 2M16 3M16 4M16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
11M15 12M15 10M15 Sources: Wind, CMS (HK) Sources: Wind, CMS (HK)
Figure 9: Oil majors cut 2016E production target amid Figure 10: Gap between crude supply and processing plunge in upstream capex volume surged to historical high in 2015
mt 2014 2015 2016E mt 30 120 25 100 20 80 15 60 10 40 5 20
0 -
PetroChina Sinopec CNOOC
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Companies, CMS (HK) Sources: Wind, CMS (HK)
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Meanwhile, China has speeded up the consturction of national oil reserve base to take advantage of low import cost. National Bureau of Statistics disclosed details regarding national oil reserves for the first time in November 2014 that Phase I of the national reserves base (including Zhoushan, Zhenhai, Dalian and Huangdao bases) completed construction and was put into operation with total storage capacity of 16.4mn cu.m and actual crude oil storage of 12.43mt. Just a year later, National Bureau of Statistics announced new breakthrough in the construction of national oil reserve base with a total of 8 oil reserve bases completed and in operation. Total storage capacity surged 74% to 28.6mn cu.m and storage crude oil climbed to 26.1mt in mid-2015, more than doubled compared to 2014. Despite the rapid increase in national oil reserves, China’s currently strategic petroleum reserves (SPR) remains low which is equivalent to around 29 days of net crude oil imports, far below IEA’s guidance of 90 days of net imports protection. China aims to complete the construction of Phase II & III of national oil reserve bases and build SPR approximately equivalent to 100 days of imports by 2020. To achieve this target, we estimate an additional 100mt of crude oil imports for the inventory build-up in the next five years, around one-third of crude oil imports in 2015. Figure 11: Accelerated construction of national oil reserve bases
Sources: National Bureau of Statistics, CMS (HK)
In addition, the relaxing policies for non-state crude oil imports trigger the increasing demand from teapot refineries. Before 2015, only 23 companies, mostly SOEs or subsidiaries of three oil majors, are qualified for non-state crude oil imports with import quota at stable 29.1mt in 2011-14, representing 10-12% of total crude oil imports during the period. Since 2015, Ministry of Commerce has speeded up the approval for non-state crude oil imports with a total of 11 private companies qualified for a combined import quota of 46.5mt. Meanwhile, Ministry of Commerce increased non-state crude oil import quota from 29.1mt in 2014 to 37.6mt in 2015, and further up to 87.6mt in 2016 which is expected to account for 24% of China crude oil imports during the year. Shangdong teapot refineries, which accounted for 19% of China total refining capacity or 69% of total teapot refining capacity in 2015, saw significant improvement in capacity utilization since January 2016 underpinned by lower import cost and increased non-state crude oil import quota. The overall capacity utilization for 35 teapot refineries in Shandong climbed over 50% in May 2016 versus 37% in 2014. Thanks to the surge in crude oil processing volume in Shandong teapot refineries, crude oil imports in Shandong and Liaoning provinces surged 24/46% YoY in 2015/3M16 and contributed 82-109% of increased crude oil imports during the period. Overall we expect China crude oil imports to grow at solid 7% CAGR in 2015E-20E to 458mt by 2020E underpinned by robust demand from both inventory build-up and teapot refineries. We believe that the ports in Northern coastal area would be the key beneficiaries from the ongoing increase in China crude oil imports.
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Figure 12: Teapot refineries accounted for around Figure 13: Capacity utilization of Shangdong teapot 27% of domestic refining capacity (mt/year) in 2015 refineries has improved since Jan 2016 Other % local refiners, 60 61, 8% Sinopec Group, Shangdon 294, 40% 50 g teapot refiners, 40 135, 19% 30 CNOOC Group, 37, 20
5% Jul-15
CNPC, Jul-14
Jan-14 Jan-15 Jan-16
Mar-14 Mar-15 Mar-16
Nov-14 Nov-15
Sep-14 Sep-15
May-14 May-15 204, 28% Sources: CNPC, CMS (HK) Sources: Wind, CMS (HK)
Figure 14: Non-state crude oil import quota more than Figure 15: Liaoning and Shandong to be key doubled in 2016 contributors to increase in crude oil imports
mt mt 2015 3M16 100 14 12 80 10 8 60 6 4 40 2 0 20 (2)
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2001 Sources: Ministry of Commerce, CMS (HK) Sources: Wind, CMS (HK)
Figure 16: Crude oil imports to maintain solid 7% CAGR in 13th FYP period
Sources: Wind, CMS (HK) estimates
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Figure 17: List of qualified companies for non-state crude oil imports Import quota Companies Corporate nature (mt) 2003-2014 1 China Petrochemical International Co., Ltd (中国石化国际事业有限公司) Sinopec Group Sinopec International Exploration and Production Corporation 2 (中国石化集团国际石油勘探开发有限公司) Sinopec Group 3 PetroChina International Co., Ltd (中国石油国际事业有限公司) PetroChina Group 4 China National Offshore Oil Corporation (中国海洋石油总公司) CNOOC 5 China North Industries Corporation (中国北方工业公司) SOE 6 China Conic Import and Export Co., Ltd (中国康力克进出口有限公司) SOE 7 China Grand Enterprises, Inc (中国远大集团公司) Private 8 Sinochem International Industries Company (中化国际实业公司) SOE 9 China Arts Huahai Import & Export Co., Ltd (中艺华海进出口有限公司) SOE 10 Haichang (Group) Co., Ltd (大连海昌集团有限公司) Private 11 Weihai Huayue Construction and Development Co., Ltd (威海华岳建设发展有限公司) Private 29.1 12 Shanghai Alison Import & Export Co., Ltd (上海埃力生进出口股份有限公司) SOE 13 Shenzhen Zhongyou Tongda Petroleum (深圳市中油通达石油有限公司) PetroChina 14 Guangdong Zhenrong Energy Co., Ltd (广东振戎能源有限公司) SOE 15 Hubei Tianfa Co., Ltd (湖北天发股份有限公司) Private 16 Heilongjiang United Oil & Chemicals Co., Ltd (黑龙江联合石油化工有限公司) Private 17 China Poly Corporation (保利科技有限公司) SOE 18 Bona Resources Group., Ltd (中宝纳资源控股管理公司) Private 19 Hunan Xinhualian International Petroleum Co., Ltd (湖南新华联国际石油贸易有限公司) Private 20 China Qing An International Trading (Group) Co., Ltd (中国庆安国际贸易集团有限公司) SOE 21 Erlian Gaolu Foreign Economic & Trade Co., Ltd (二连市高陆对外经济贸易有限责任公司) Private 22 Fujian Refining & Petrochemical Co., Ltd (福建联合石油化工有限公司) Sinopec 23 Guang Hui Energy Co., Ltd (新疆广汇石油有限公司) Private Since 2015 1 Shandong Dongming Petrochemical Group (山东东明石化集团有限公司) Private 7.50 2 Panjin Norther Asphalt Co., Ltd (盘锦北方沥青燃料有限公司) Private 7.00 3 Shandong Kenli Petrochemical Group (山东垦利石化集团) Private 2.52 4 LiHuaYi Group Co. Ltd (山东利津石油化工厂有限公司) Private 3.50 5 Dongying Yatong Petrochemical Co., Ltd (东营市亚通石化有限公司) Private 3.36 6 Baota Petrochemical Group (宝塔石化集团) Private 6.16 7 Wanda Petrochemical Group (山东天弘化学有限公司) Private 4.40 8 Shandong Huifeng Petrochemical Group Co., Ltd (山东汇丰石化集团) Private 4.16 9 Shandong Chambroad Petrochemicals Co., Ltd (山东京博石油化学有限公司) Private 3.31 10 Shandong Shouguang Luqing Petrochemicals Co., Ltd (山东寿光鲁清石化有限公司) Private 2.58 11 Qirun Group (东营齐润化工有限公司) Private 2.20 Total 46.49 Sources: Ministry of Commerce, NDRC, CMS (HK)
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Largest crude oil terminal operator in China to benefit from robust oil imports Sinopec Kantons is the largest crude oil terminal operator in China with a strategic location covering Yangtze River Delta, Peal River Delta and Bohai-Rim Economic Circle. It currently owns and operates 7 crude oil terminals located in China coastline with a total of 35 berths and combined annual throughput capacity of 272.5mt. The actual throughput volume came in at 186.8mt in 2015, up 15% YoY and accounting for 56% of China crude oil imports during the period. We believe that Sinopec Kantons is a key beneficiary of robust China crude oil imports given its leading position in petrochemical storage and logistics industry. Figure 18: Sinopec Kantons’ domestic crude oil terminals overview Throughput Storage Own- Ports Location Adjacent sea Berth capacity capacity Major customer ership (mt) (kcu.m)
Huade South China Petrochemical 100% Guangdong Sea 2 30.0 1,110 Sinopec Guangzhou refinery Sinopec Maoming refinery Sinopec Beihai refinery South China Sinopec Dongxing refinery Zhanjiang Port 50% Guangdong Sea 14 45.0 678 Local refineries Sinopec Jinling refinery East China Sinopec Yangtze refinery Ningbo Shihua 50% Zhejiang Sea 3 35.0 - Sinopec Shanghai refinery Sinopec Wuhan refinery Sinopec Jiujing refinery Sinopec Anqing refinery Rizhao Shihua 50% Shandong Yellow Sea 2 38.5 - Local refineries Sinopec Qilu refinery Sinopec Jinan refinery Sinopec Qingdao refinery Qingdao Shihua 50% Shandong Yellow Sea 12 84.0 1,032 Local refineries Sinopec Yanshan refinery Sinopec Tianjin refinery Sinopec Cangzhou refinery Tianjin Shihua 50% Tianjin Bohai Sea 1 20.0 - Sinopec Shijiazhuang refinery Sinopec Yanshan refinery Sinopec Tianjin refinery Sinopec Cangzhou refinery Caofeidian Shihua 90% Hebei Bohai Sea 1 20.0 - Sinopec Shijiazhuang refinery
Total 35 272.5 Source: Company, CMS (HK)
Figure 19: Sinopec Kantons accounted for 56% of Figure 20: Sinopec is the key client for Sinopec China crude oil imports in 2015 Kantons’ domestic crude jetty services (2015)
Third parties, 27%
Others, 44% Sinopec kantons, 56%
Sinopec, 73%
Sources: Company, Wind, CMS (HK) Sources: Company, CMS (HK) estimates
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Sinopec is the key client for Kantons’ domestic crude oil jetty services business and accounted for around 73% of its throughput volume in 2015 underpinned by strategic location of Kantons’ crude oil terminals which connect with most of pipeline network of Sinopec’s coastal and riverside refineries. Sinopec guided a relatively stable crude oil processing volume in 2016 which implies 2-3% YoY increase in the imports volume given 7.5% YoY cut in domestic crude oil produciton target. We believe that the continuing increase in Sinopec’s crude oil imports would support the base volume for Kantons’ key terminals in coastal area. Meanwhile, Sinopec Kantons actively explores new clients, especially local refineries. The throughput volume in its Rizhao Shihua and Qingdao Shihua ports in Shandong province surged 36% and 20% in 2015 thanks to robust import demand from teapot refineries which already accounted for around 40-50% of throughput volume in the two ports in 2015. We expect Rizhao Shihua and Qingdao Shiha ports to continue to be the key driver for future throughput volume growth underpinned by 1) capacity expansion in Rizhao Shihua (another 30,000 berths with annual throughput of 20mt has been approved and is expected to come into operation by 2017E) and 2) unique port assets in Shandong leveraging on robust import demand from teapot refineries (Rizhao Shihua and Qingdao Shihua ports are the only crude oil terminals in Shandong provice capable of unloading Very Large Crude Carriers). We expect overall throughput volume to grow at 9% in 2015-18E mainly driven by rapid growth in Rizhao and Qingdao ports, slightly beating 7% CAGR on China crude oil imports during the period. We expect attributable net profit from domestic jetty servcies to grow at a solid 9% in 2015-18E mainly underpinned by increase in throughput volume and account for 72% of total net profit in 2018E, down from 78% in 2015 but remaining a key earnings contributor. Figure 21: Capacity upgrade in Rizhao Shihua to lift Figure 22: Throughput volume to reach 244mt in total throughput capacity to 293mt/year in 2017E 2018E with capacity utilization up to 83%
mt mt Throughput volume Capacity utilization % 300 260 100
240 280 80 220 260 200 60
240 180 40 160 220 20 140 200 120 - 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E
Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates
Figure 23: Attributable net profit from domestic crude Figure 24: Increasing earnings contribution from oil jetty services to grow 9% CAGR in 2015-18E Rizhao Shihua and Qingdao Shihua
HK$ mn Net profit from crude oil jetty services % Huade Petrochemical Zhanjiang Port Ningbo Shihua Rizhao Shihua 1,200 Share of total net profit 150 Qingdao Shihua Tianjin Shihua Caofeidian Shihua 1,000 120 100% 800 90 80% 600 60% 60 400 40% 30 200 20%
0 - 0% 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E
Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates
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Figure 25: Rizhao and Qingdao Ports to be key drivers for future throughput volume growth
Sources: Company, CMS (HK) estimates
Figure 26: Crude oil terminals utilization improved gradually
Sources: Company, CMS (HK) estimates
Figure 27: ROE comparison for key crude oil terminals
Sources: Company, CMS (HK)
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Possible M&As support future expansion Sinopec Kantons has turned from a lcoal oil trading company into a leading petrochemical storage and logsitics company in China over the past decade underpinned by the support of its parent company, Sinopec, which injected 50% interests in Zhanjiang Port in 2011 and 50-90% interests in other five crude oil terminal companies in 2012. Since asset injections, domestic crude oil jetty services has become core business for Sinopec Kantons and contributed all the profit before pipeline assets injected in 2015. As the only listed platform for Sinopec’s petrochemical storage and logistics business, we believe that further injection of Sinopec’s remaining crude oil terminal assets to Kantons is possible given that Sinopec is on the way to spin off its professional subsidiaries. Sinopec Kantons handled around 70% of Sinopec’s crude oil imports in 2015 with the remaining 30% going through Sinopec’s other four crude oil terminals, namely Quangzhou Port in Fujian, Zhoushan Shihau in Zhejiang, Yangpu Port in Hainan and Maoming Port in Shandong. The annual throughput capacity of four terminals currently owned by Sinopec came in at 63.5mt, or 23% of Sinopec Kantons’ total capacity in 2015. Figure 28: Key crude oil terminal assets injection from Sinopec Completion Assets injected Consideration Valuation Date RMB mn P/E P/B Oct-2011 50% equity interests in Zhanjiang Port 332 3.6 0.9 50% equity interests in Ningbo Shihua, Rizhao Shihua, Qingdao Shihua, Tianjin Shihua Ports and 90% equity Oct-2012 interests in Caofeidian Shihua Port 1,810 9.9x 1.1x Sources: Company, CMS (HK)
Figure 29: The four crude oil terminals currently owned by Sinopec Throughput >300,00 capacity Location Adjacent sea DWT berth (mt/year) Major customer
Quanzhou Port Fujian East China Sea 1 20.0 Sinopec Fujian refinery Sinopec Zhenhai refinery Sinopec Shanghai refinery Sinopec Gaoqiao refinery Siopec Jinling P refinery Zhoushan Shihua Zhejiang East China Sea 1 15.0 Sinopec Yangtze refinery
Yangpu Port Hainan South China Sea 1 17.5 Sinopec Hainan refinery
Maoming Port Guangdong South China Sea - 11.0 Sinopec Maoming refinery Sources: Company, CMS (HK)
Figure 30: Sinopec Kantons handled 70% of Figure 31: Sinopec has 4 crude oil terminals with Sinopec’s crude oil imports in 2015 capacity of 63.5mt/year which are not in Kantons yet
mt/year Others, 300 272.5 30% 250
200 150 100 63.5
Sinopec 50 kantons, 70% 0 Sinopec Kantons Four terminals owned by Sinopec Sources: Companies, CMS (HK) Sources: Companies, CMS (HK)
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Newly acquired pipeline assets to explore natural gas transmission business Acquisition completed in December 2015 with attractive valuation Sinopec Kantons acquired 100% interests in Yu-Ji Pipeline from Sinopec at a total consideration of RMB2.6bn in December 2015. Yu-Ji Pipeline is responsible for the transmission of natural gas of Daniudi Gas Field of Sinopec and passing through four provinces, namely, Shaaxi, Shanxi, Henan and Shandong provinces with a total length of 944km. The trunk line was built with a designed annual transmission capacity of 3bcm which is expected to upgrade to 5bcm by 2016 with a total capex of RMB800mn, of which RMB420mn has incurred. The consideration represents 1.7x of net assets as at the end of November 2014 or 2013 P/E of 9.7x, which we believe is attractive given comparable tranactions valued at 2.0-8.0x P/B and 12.7-13.7x P/E. We believe that the acquistion would help Sinopec Kantons diversify its storage and logistics business and leverage on robust domestic natural gas consumption in the long run. Figure 32: Primary comparable transactions Date of Assets acquisition Consideration Valuation announcement RMB mn P/E P/B Sinopec Kantons to acquire 100% equity interests in Yu-Ji Pipeline company which owns and operates Yulin-Jinan gas pipeline with a total length of 944km and annual capacity of 3bcm which is expected to Dec-2014 upgrade to 5bcm by 2016. 2,577 9.7x 1.7 Tian Lun Gas (1600 HK) to acquire 60% interests in Chaozhou Huamao Energy Distribution Company which is engaged in the investment and construction of natural gas pipelines, as well as the distribution and sales of Dec-2013 natural gas in Fuyang, Longhu and Dongfeng in Chaozhou 432 N/A 8.0 Kunlun Energy (135 HK) to acquire 60% interests in PetroChina Beijing Gas Pipeline which owns and operates No.1 and No.2 Shaanxi-Beijing Pipelines with a total length of 2.200km (annual capacity of 20bcm) with No. 3 Shaanxi- Dec-2010 Beijing Pipeline under construction (annual capacity of 15bcm) 18,879 12.7 2.7 Jinhong Energy (000669 SZ) to acquire 100% interests in SinoPetro New Energy which operates long distance gas pipeline (Xiangheng line,Liaotiai Sep-2010 lines, Jizao line, Yingzhang line, Taixin line) and city gas pipeline network 2,367 13.7 2.0 Sources: Company, CMS (HK)
Figure 33: Yu-Ji Pipeline crosses Shaanxi, Shanxi, Henan and Shandong provinces with a total length of 944km
Sources: Company, CMS (HK)
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Gas transmission volume to recover from low base in 2015 Natural gas is a fast growing energy source in China with consumption CAGR at 15% over the past decade versus an average GDP growth of 9.5% during the period, reflecting robust demand from industrial users and increased share of natural gas in total energy consumption (up from 2.4% in 2005 to around 5.9% in 2015). However, natural gas consumption growth dropped to 3.7% in 2015, the lowest growth rate since 1999 and below the GDP growth of 6.9% due to slowdown in industrial production and delay in domestic natural gas price cut versus plunge in international oil price. However, domestic natural gas consumption has recovered since 2016 underpinned by RMB0.7/cu.m cut in city- gate gas price for non-residential users on 20 November 2015. Apparent natural gas consumption jumped 15% in 3M16 with production and imports up 4% YoY and 23% YoY, respectively. According to “Energy development strategic action plan (2014-2020)” and “National plan response to climate changes (2014-2020)” issued by central government in 2014, domestic natural gas consumption is expected to reach 360bcm by 2020 and accounts for more than 10% of total primary energy consumption by then, which implies a robust 14% CAGR in natural gas consumption during 2015-20E. Figure 34: Domestic natural gas consumption surged Figure 35: Robust natural gas imports with lower in 3M16 after slowdown in 2015 import price
Domestic production Net imports LNG Pipline gas bcm % bcm RMB/cu.m YoY growth Average import price 200 16 8 3.0
12 150 6 2.5 8 4 2.0 100 4 2 1.5 50 0 0 1.0
0 (4)
Jul-15
Apr-15 Oct-15
Jun-15
Mar-15 Mar-16
Nov-15 Dec-15
Aug-15 Sep-15
2M15 3M15 4M15 5M15 6M15 7M15 8M15 9M15 2M16 3M16
May-15
10M15 11M15 12M15 Avg 2M16 Avg 2M15 Avg Sources: Wind, CMS (HK) Sources: Wind, CMS (HK)
Figure 36: Natural gas consumption by region
Sources: Wind, CMS (HK)
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Figure 37: Natural gas consumption to remain robust in 13th Five Year Plan period
Sources: Wind, NDRC, CMS (HK)
The transmission volume in Yu-Ji Pipeline dropped 7.8% YoY to 3.0bcm in 2015, mainly dragged by 37% YoY plunge in transmission volume to Shandong province despite 39% YoY increase in transmission volume to other provinces. The plunge in Shandong was mainly due to increased LNG imports in the area given that Sinopec’s Qingdao LNG terminal in Shandong was put into operation at the end of 2014 with Phase I capacity of 3mt (4.2bcm). We expect transmission volume in Yu-Ji Pipeline to rebound by a moderate 12% YoY to 3.3bcm in 2016E underpinned by increased natural gas demand in Shaanxi, Shanxi and Henan. Meanwhile, we expect the transmission volume to Shandong to remain weak given robust LNG imports ytd. We estimate the net profit from natural gas pipeline transmission service business to grow at robust 20% CAGR in 2015-18E thanks to 9% CAGR on transmission volume and operation leverage on capacity ramp-up. The segment is expected to contribute 31% of total net profit in 2018E, up from 25% in 2015, and will be the key driver for earnings growth in next three years. Figure 38: Natural gas transmission volume to Figure 39: Net profit from pipeline segment to grow at recover from low base in 2015 robust 20% CAGR in 2015-18E Net profit from pipeline segment bcm Shaanxi Shanxi Henan/Hebei Shandong HK$ mn % % of total profit 4.0 500 35 30 400 3.0 25 300 20 2.0 200 15 1.0 10 100 5 0.0 0 - 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E
Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates
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Limited risk on transmisson tariff cut given reasonable return China government is pushing the reform of pricing mechanism in key industries. It announced the pricing mechanism reform for electricity transmission and distribution tariff in 2015 and extended the pilot scheme to 18 provincial power grid and one regional power grid in 2016. It was reported that natural gas pricing mechanism reform is being drafted with transmission and distribution tariff to be set up based on “approved investment plus reasonable return.” We believe that it is likely that central government will set up a benchmark transmission tariff in each province to reduce the entry barrier given the currrently diverse transmission tariff by pipelines. We believe that the pipelines which enjoy higher than industry average return may face tariff cut while the other pipelines with lower returns may see increase in tariff in the long-run. Sinopec Kantons’ Yu-Ji Pipeline reported a moderate ROA of 3.9% in 2015, far below Kunlun’s Shaanxi-Beijing (I-III) Pipeline’s 19%. As Yu-Ji pipeline is under capacity upgrade, we expect ROA to improve to 6% in 2018E, which is still in a reasonable range. We believe that the tariff cut risks for Yu-Ji Pipeline is limited given its reasonable return. Figure 40: ROA comparison for natural gas pipeline Figure 41: Improved return in Yu-Ji Pipeline in the business long-run but remaining in reasonable range
% Sinopec Kantons Kunlun Energy % ROA ROE 15.3 19.9 16.0 14.3 14.5 20 13.6
14.9 12.0 11.1 15
8.0 6.2 10 5.6 4.8 5.0 4.8 3.9 5 3.9 4.0
0 0.0 2014 2015 2014 2015 2016E 2017E 2018E
Sources: Company, CMS (HK) Sources: Company, CMS (HK) estimates
Large size of pipeline assets held by Sinopec to underpin future M&As As the second largest crude oil and natural gas producer in China, Sinopec has several long distance natrual gas pipelines in operation or under construction, including Sichuan to East Pipeline which started operation in September 2010 with designed capacity of 12bcm, Xin-Yue-Zhe gas pipeline which has received official approval from NDRC in 2015 and under construction with designed capacity of 30bcm. Meanwhile, Sinopec is planning for another natural gas pipeline, Xin-Lu pipeline with similar capacity as Xin-Yue-Zhe pipeline. Since the injection of Yu-Ji Pipeline in 2015, Sinopec Kantons has entered the natural gas tramsimission business which contributed around 25% of total net profit in 2015. Though it is still at a preliminary stage, we believe that Sinopec’s robust pipeline assets portfolio would underpin the development of Kantons’ natural gas business in the long run. Figure 42: Main gas pipelines held by Sinopec Transmission Gas Pipeline Capacity Source of natural gas Capex Length Date of operation bcm/year RMB bn km Sichuan to East 12.0 Puguang gas field 62.7 2,229 Sep 2010 Xin-Zhe-Yu 30.0 Coal-to-gas in Xinjiang 159.0 8,372 Under construction Xin-Lu 30.0 Coal-to-gas in Xinjiang 86.0 4,463 Under planning Source: Sinopec, CMS (HK)
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Ramp-up of overseas storage and logistics business For the overseas storage business, Sinopec Kantons now jointly operates four petrochemical terminals (three in Europe and one in Middle East) with a total storage design capacity of 2.78mn cu.m. Meanwhile, Sinopec Kantons has an associate company engaging in LNG shipping business (two LNG vessels in operation and six LNG vessels under construction). Its fully-owned chartered oil vessel reported a first profit in 2015 after four years of loss-making underpinned by robust crude imports in China. The combined attributable net profit from overseas businesses came in at HK$82mn in 2015, up from HK$33mn in 2014. We expect net profit from overseas business to improve to HK$116mn in 2018E underpinned by capacity ramp-up, accounting for 8% of total net profit by then. Its 50% owned Fujairah Oil Terminal (FOT) in UAE, Middle East commenced operation in 2015 which reported attributable net loss of HK$3.2mn with 55% of storage capacity leased during the period. However, its bottom line saw a significant turnaround in 2H15 after the fade-out of impact from one-off refinancing expenses in 1H15. We expect net profit from FOT to turnaround in 2016E with a net profit of HK$23mn given that 92% of the storage area has been leased and 100% of the storage area are under contract as at the end of December 2015. Meanwhile, for LNG shipping business, 6 LNG vessels under construction are expected to deliver during 2016E- 18E, lifting the number of operating vessels to 8 by the end of 2018E which would underpin further increase in the profitability of the business. We expect attributable net profit from LNG shipping business to reach HK$23mn in 2018E versus HK$3mn in 2015 thanks to the ramp-up of shipping capacity. Figure 43: Overseas business overview
Storage capacity/ Owner- Storage tanks/ Vessel capacity ship Location/voyage Vessels (k cu.m) Vesta Terminal Antwerp 50% Belgium, Europe 65 827.0 Vesta Terminal Tallinn 50% Estonia, Europe 35 405.6 Vesta Terminal Flushing 50% Holland, Europe 27 388.5 Fujairah Oil Terminal 50% UAE, Middle East 34 1,155.0 Papua New Guinea LNG vessels 30% Papua New Guinea China Qingdao 2 172.0 Australia Pacific LNG Vessels 30% Australia Ports in China 6 174.0 Charted oil vessel 100% Middle East Far East in Asia 1 300,000DWT Sources: Company, CMS (HK)
Figure 44: Number of LNG vessels to climb to 8 by Figure 45: Attributable net profit from overseas the end of 2018E business to improve gradually
Unit HK$ mn Vesta terminals Charted oil vessel 10 150 LNG shipping FOT terminal
8 100
50 6 0 4 (50) 2 (100)
0 (150) 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E
Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates
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Earnings to grow at solid 12% CAGR in 2015-18E Solid growth underpinned by current capacity ramp-up even without M&As We expect the overall utilization for its 7 domestic crude oil terminals to improve from 69% in 2015 to 83% in 2018E with throughput volume up from 187mt in 2015 to 244mt in 2018E underpinned by robust crude oil imports, representing a CAGR of 9% during the period. Meanwhile, we expect the transmission volume in Yu-Ji Pipeline to increase from 3.0bcm in 2015 to 3.9bcm in 2018E amid recovery in domestic natural gas consumption. We expect overall net profit to increase from HK$1,027mn in 2015 to HK$1,440mn in 2018E underpinned by capacity ramp-up, representing a solid 12% CAGR during the period, of which domestic crude oil jetty services business remains the key earnings contributor with net profit up from HK$796mn in 2015 to HK$1,034mn in 2018E, representing a CAGR of 9% during the period and accounting for 72% of total profit in 2018E versus 78% in 2015. Meanwhile, we expect natural gas pipelie business to be key driver with net profit up from HK$254mn in 2015 to HK$441mn in 2018E underpinned recovery in tramsmission volume, representing a robust 20% CAGR during the period and account for 31% of total profit in 2018E versus 25% in 2015. We expect the improvement in earnings contribution from overseas market to be offset by the increasing interest expenses and headquarter expenses. Our earnings projection does not include any possible further assets injections from Sinopec given the uncertainty for the timing of assets injections and limited financial information for unlisted assets. Meanwhile, we estimate the remaining four crude oil terminals owned by Sinopec would lift Sinopec Kantons’ domestic crude oil teminal capacity by 23% upon injection while the other key pipeline (Sichuan to East) operated and owned by Sinopec would help double Sinopec Kantons’ current transmission capacity upon injection. Figure 46: Net profit to grow at solid 12% CAGR in Figure 47: Robust gross cash underpins future 2015-18E increase in dividend
Crude oil jetty services NG pipeline HK$ mn Cash Net profit Dividend Overseas Others HK$ mn 3,000 Total net profit 1,600 2,500
1,200 2,000
800 1,500 1,000 400 500 0 0 (400) 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates
Consolidated revenue and cost only reflects part of businesses Currently only one crude oil terminal (Huade Petrochemical), Yu-Ji Pipeline and charted oil vessel are 100% owned by Sinopec Kantons which are cosolidated in the income statement with remaining interests in other 6 domestic crude oil terminals, 2 overseas storgage project and LNG shipping business recognized as profit or loss from associates/JVs in the income statement. Consoldiated business contributed for around 35% of total net profit in 2015 with remaining 65% from associates and JVs. For the consolidated crude oil jetty services business, Huade Petrochemical reported a relative stable profit margin ranged HK$13.9-14.4/t in 2013-15 with relative stable throughput volume during the period. Given no further upgrade plan in Sinopec Guangzhou refinery, the key client for Huade Petrochemical, we expect profit margin to maintain relative stable at HK$14.1-14.7/t in 2016E-18E. Meanwhile, we expect dollar margin for natural gas pipeline to improve from HK$0.09/cu.m in 2015 to HK$0.11/cu.m in 2018E thanks to capacity ramp-up. Overall we expect gross margin to improve from 41.1% in 2015 to 47.7% in 2018E mainly due to margin expansion in pipeline business. Meanwhile for associates and JVs, 6 crude oil terminals reported lower average profit margin HK$6.5-6.7/t in 2013- 15 given lack of storage facilities in ports compared to Huade Petrochemical. We expect profit margin to improve slightly from HK$6.6/t in 2015 to HK$6.8/t thanks to margin expansion in Qingdao Shihua and Caofeidian Shihua
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upon capacity ramp-up. For overseas storage projects, we expect relative stable margin for Vesta terminals assuming flat throughput volume but we expect the profit margin in FOT to turn around from a loss of HK$10.2/cu.m in 2015 to a profit of HK$40/cu.mn in2016 thanks to increased leased area and the fade-out of impact from one-off refinancing expenses. Possible increase in dividend payout given robust cash on hand Given the solid balance sheet with net cash position before acquistion of Yu-Ji pipeline, Sinopc Kantons decided to finance the acquisition of Yu-Ji pipeline by debt other than equity. Upon the payment of consideration and consoldiation of Yu-Ji Pipeline assets, we estimate net gearing at 51% in 2016E, which is still within reasonable range. Meanwhile the financial position for associates and JVs is also solid with net gearing at 12-36% in 2015. Despite increased profitability upon completion of acquisition of Ju-Yi Pipeline, dividend payout remains weak with payout ratio at a moderate 12% in 2015, which we believe is partly due to the coming payment of acquisition consideration. We expect cash to remain solid at HK$894mn in 2016E versus HK$1,058mn in 2015 thanks to robust cash generated from pipeline assets, implying a possible increase in the dividend payout. We expect dividend payout ratio to increase from 12% in 2015 to 30% in 2016E and up to 50% in the long run underpined by strong cash on hand. Figure 48: Company organizational chart Sinopec Kantons Hldg Ltd (934 HK) 100% 100% Sinomart KTS Kantons Development International -Trading of crude oil Investment Ltd -Vessel charter services Huade 100% Subsi Petrochemical 100% Subsi Ju Ji Pipeline -Crude oil jetty Company services
30% Asso East China 95% Subsi Pt West Point LNG Shipping Terminal Investment
50% JV Fujairah Oil 49% JV China Energy Terminal FZC Shipping Investment
50% JV Vesta Terminals B.V.
50% Asso Zhan Jiang Port Petrochemical Jetty
50% JV Ningbo Shihua
50% JV Qingdao Shihua
50% JV Tianjin Port Shihua
50% JV Rizhao Shihua
90% JV Tangshan Caofeidian Shihua
Sources: Company, CMS (HK)
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Figure 49: Key assumptions and earnings forecast by segment 2013 2014 2015 2016E 2017E 2018E Key operating data Throughput volume in ports mt 156.0 162.9 186.8 213.5 233.8 243.6 Huade Petrochemical mt 11.7 12.7 12.1 12.7 12.7 12.7 Zhanjiang Port mt 24.0 23.4 25.6 25.6 25.6 25.6 Ningbo Shihua mt 24.8 27.3 28.8 30.2 31.7 33.3 Rizhao Shihua mt 23.5 23.9 32.5 42.2 50.7 55.8 Qingdao Shihua mt 50.8 51.2 61.5 73.8 81.2 81.2 Tianjin Shihua mt 10.1 11.9 12.0 13.2 14.5 16.0 Caofeidian Shihua mt 11.1 12.4 14.3 15.8 17.4 19.1 % YoY % 13.5 4.4 14.7 14.3 9.5 4.2 Huade Petrochemical % (6.1) 8.6 (4.2) 5.0 - - Zhanjiang Port % 8.8 (2.5) 9.2 - - - Ningbo Shihua % (0.1) 10.2 5.2 5.0 5.0 5.0 Rizhao Shihua % 49.8 1.7 35.8 30.0 20.0 10.0 Qingdao Shihua % 31.4 0.8 20.1 20.0 10.0 - Tianjin Shihua % (6.9) 18.4 0.7 10.0 10.0 10.0 Caofeidian Shihua % (14.0) 11.8 16.0 10.0 10.0 10.0 Profit margin HK$/t 7.1 7.3 7.1 7.3 7.2 7.2 Huade Petrochemical HK$/t 14.2 13.9 14.4 14.7 14.3 14.1 Zhanjiang Port HK$/t 9.1 8.9 9.0 9.0 9.0 9.0 Ningbo Shihua HK$/t 3.6 3.7 3.4 3.4 3.4 3.4 Rizhao Shihua HK$/t 7.9 8.2 7.4 7.8 7.3 7.5 Qingdao Shihua HK$/t 5.8 7.7 6.6 6.9 7.1 7.1 Tianjin Shihua HK$/t 0.6 2.0 3.9 3.9 3.9 3.9 Caofeidian Shihua HK$/t 13.5 6.7 8.6 8.8 9.0 9.1 Gas transmission volume mcu.m n/a 3,226 2,985 3,343 3,615 3,911 Shaanxi mcu.m n/a 270 325 390 429 472 Shanxi mcu.m n/a 39 93 121 133 146 Henan/Hebei mcu.m n/a 941 1,325 1,590 1,749 1,924 Shandong mcu.m n/a 1,976 1,242 1,242 1,304 1,369 % YoY % n/a n/a (7.5) 12.0 8.1 8.2 Shaanxi % n/a n/a 20.4 20.0 10.0 10.0 Shanxi % n/a n/a 138.5 30.0 10.0 10.0 Henan/Hebei % n/a n/a 40.8 20.0 10.0 10.0 Shandong % n/a n/a (37.1) - 5.0 5.0 Gas transmission tariff RMB/cu.m n/a 0.39 0.36 0.35 0.35 0.35 Shaanxi RMB/cu.m n/a 0.05 0.05 0.05 0.05 0.05 Shanxi RMB/cu.m n/a 0.19 0.19 0.19 0.19 0.19 Henan/Hebei RMB/cu.m n/a 0.35 0.35 0.35 0.35 0.35 Shandong RMB/cu.m n/a 0.46 0.46 0.46 0.46 0.46 Key financial data Net profit by segment HK$ mn 491 1,018 1,027 1,223 1,342 1,440 Domestic crude oil jetty services HK$ mn 696 712 796 924 992 1,034 NG pipeline transmission HK$ mn n/a 318 254 335 385 441 Others HK$ mn (204) (12) (23) (36) (34) (35) % YoY % 68.4 107.2 0.8 19.1 9.7 7.3 Domestic crude oil jetty services % 100.9 2.4 11.8 16.1 7.3 4.3 NG pipeline transmission % n/a n/a (20.2) 32.0 14.7 14.5 Others % 274.8 (94.0) 90.7 56.0 (5.8) 1.5 Source: Company, CMS (HK) estimates
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Initiate with BUY and TP of HK$5.14 Sinopec Kantons is trading at 2016E P/B of 0.9x, close to the valuation for H-share listed China ports despite its more faverable ROE of 12.3% versus 6.9% for China ports. Meanwhile, its current 2016E P/E of 7.6x is also far below the average of 13.4x for China ports. We believe Sinopec Kantons’ current valuation has not reflected 1) its unique ports assets speicalized in crude oil terminals leveraging on robust crude oil imports; and 2) the higher valuation for its newly acquired natural gas transimission business which will benefit from robust domestic natural gas consumption in the long run. Currently China city-gas distributors which operate city-gas pipeline and branch of long distance pipeline are trading at 2016E P/E of 11.7x or P/B of 1.6x with moderate higher ROE of 13.8%. Meanwhile, its global peers are trading at even higher mutliples. Global ports are trading at 2016E P/E of 19.0x or P/B of 1.8x despite lower ROE while global oil storage and logsitics companies are trading at 2016E P/E of 19.9x or P/B of 2.3x with comparable ROE of 12.2%. We use P/B versus ROE to value Sinopec Kantons, as we believe that this methodology would capture the return profile of the company. We select domestic port and city-gas distributors as its peer group and find that the stock is trading significantly below the sector average 2016E P/B multiple based on its 2016E ROE. We derive our target price of HK$5.14 based on sector P/B-ROE, which implies 2016E P/E of 10.4x or P/B of 1.2x. Historically Sinopec Kantons traded at an average P/E of 11.1X or P/B of 0.9x. Given fundamental changes on business nature underpinnd by aggressive M&As over the past five years, we believe that the historical valuation may be relevant. Meawnwhile, it was trading at a robust P/E of 19.9x or P/B of 1.5x during 2012-15 after the current business was injected. We believe recent de-rating on the stock is overdone given its solid earnings growth outlook and improving ROE in the long run upon capacity ramp-up. Figure 50: Sinopec Kantons is attractive based on P/B vs. ROE framework
Sources: Bloomberg, CMS (HK) estimates
Figure 51: Forward P/E chart Figure 52: Forward P/B chart
x +1 SD:18.9X IPO-to-date avg:11.1X x +1 SD:1.3X IPO-to-date avg:0.9X 2.0 -1 SD:3.3X -1 SD:0.4X 35
30 1.5 25
20 1.0 15
10 0.5 5
0 0.0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Sources: Bloomberg, CMS (HK) estimates Sources: Bloomberg, CMS (HK) estimates
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Appendix: Sinopec Kantons – Leading petrochemical storage and logistics company in China Sinopec Kantons Holdings Limited was listed on the Hong Kong Stock Exchange on 25 June,1999 (Stock Code: 00934). Currently, the total issued share capital of Kantons Holdings is 2,486mn shares of which 1,500mn shares are held by Sinopec, representing 60.3% ot total issued capital. Sinpec Kantons is the only listed platform among Sinopec Group that focusing on petrochemical storage and logistics business. Sinopec Kantons is the largest crude oil terminal operator in China underpinned by the support of its parent company, Sinopec, which injected 50% interests in Zhanjiang Port in 2011 and 50-90% interests in five other crude oil terminals in 2012. Sinopec Kantons currently owns and operates 7 crude oil terminals located in China coastline with a total of 35 berths and combined annual throughput capacity of 272.5mt. The actual throughput volume came in at 186.8mt in 2015, up 15% YoY and accounting for 56% of China crude oil imports during the period Sinopec Kantons entered the natural gas transmission business in 2015 by acquiring 100% interests in Yu-Ji Pipeline from Sinopec which help diversify its midstream business and underpin future earnings growth. For the overseas market, Sinopec Kantons have developed two storage projects: Vesta in Europe and FOT in Middle East. It also engages in the LNG shipping business and chartered oil vessel business.
Figure 53: Key subsidiaries of Sinopec Group
Sources: Companies, CMS (HK)
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Figure 54: Management profile Name Age Position Background Appointed Chairman of Kantons in May 2014 Currently the general manager and executive director of China International United Petroleum & Chemicals Co., Ltd. (“Unipec”) Previously as Business Manager of Crude Oil Department of UNIPEC, Business Manager and Deputy Manager of UNIPEC Asia Company Limited, Deputy Manager and Manager of Crude Oil Department of UNIPEC and Mr. Chen Bo 53 Chairman Assistant to General Manager and Deputy General Manager of UNIPEC
Professor-level accountant with a master degree Appointed as Deputy Chairman of Kantons in December 2015 Mr. Xiang Xiwen 50 Deputy Chairman Previously as Deputy Head of the Finance Department of Sinopec Corp Senior engineer Appointed as Executive Director of Kantons in December 2015 Previously as Deputy Director of the Planning & Development Department Mr. Dai Liqi 48 Executive Director (Foreign Cooperation Office) of Sinopec Corp Professor-level economist with a master degree in MBA Appointed as Executive Director of Kantons in December 2015 Previously as Chief Accountant of Guangzhou Branch Company of Sinopec Mr. Li Jianxin 48 Executive Director Corp Senior engineer with a master’s degree in oil and natural gas engineering Appointed as Executive Director of Kantons in December 2015 Previously as Deputy General Manager and the Standing Committee Member of the Communist Party Committee of Sinopec Pipeline Storage & Mr. Wang Guotao 50 Executive Director Transportation Company Senior economist with a master degree in MBA Appointed as Managing Director of Kantons in January 2002 Previous as Deputy General Manager of Guangzhou Yinzhu Polypropylene Mr. Ye Zhi Jun 50 Managing Director Ltd. Deputy Manager of Sales Centre of Sinopec Guangzhou Company GBM, JP. Appointed as Independent Non-ED in June 1999 Member of the Preparatory Committee for the Hong Kong Special Administrative Region (PRC) and Hong Kong Affairs Advisor (PRC). Currently an independent Non-ED of many companies such as Guangnan Holdings, Minmetals Land. A Director of Green Fun Limited and Love, Ms. Tam Wai Chu Maria 70 Independent Non-ED Family Foundation Limited Appointed as Independent Non-ED in September 2004. Former President of the Hong Kong Institute of Certified Public Accountants Currently an Independent Non-ED of New China Life Insurance Co., Ltd and Mr. Fong Chung Mark 64 Independent Non-ED Macau Legend Development Limited. A Non-ED of Worldsec Limited
BBS, JP, hold a Ph.D. degree in Economics Appointed as Independent Non-ED in March 2014 A Hong Kong Deputy of the 12th National People's Congress. Chairman of the Land and Development Advisory Committee. An Independent Non-ED of Dr. Wong Yau Kar, David 58 Independent Non-ED many companies such as China Jiuhao Health Industry Corp Source: Company, CMS (HK)
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Figure 55: Sinopec Kantons’ domestic business overview
Sources: Company, CMS (HK)
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Figure 56: Sinopec Kantons’ overseas business overview
Sources: Company, CMS (HK)
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Figure 57: Key milestone of Sinopec Kantons
1999 1999-06-25 Listed on the Stock Exchange of Hong Kong. 2000 2000-09-01 Included in the Hang Seng China Affiliated Corporation Index Ranked 20th in the top 100 listed companies in the PRC selected by Fortune magazine, with revenue of 2002 2002-01-01 RMB9.144 bn. 2003-08-04 Included in Hang Seng Composite Index as a constituent stock. A 300,000-tonne bonded crude oil storage facilities set up in Ma Bian Zhou Island Storage Tank Area, in 2003 2003-12-31 Huizhou City, Guangdong Province, was put into operation formally. Commenced the investment and construction of a 300,000-tonnes berth at Huizhou to raise berth unload 2005 2005-12-31 capacity so as to meet downstream customers’ needs for increasing productivity. Disposed of its petrol station business and acquired the additional 30% of equity interests of Huade 2006 2006-12-31 Petrochemical which became the wholly owned subsidiary since then. Expanded its storage and transportation capacity by putting into operation a new crude oil jetty of 300,000 2007 2007-12-31 tonnes capacity, in Ma Bian Zhou Island, Huizhou City. Entered into the “Joint Investment Agreement of LNG Shipping Investment Company” with China Shipping 2010-11-30 Development Company. Entered into a joint venture framework agreement in relation to the construction of a 2.6 million m3 oil storage 2010 2010-04-25 complex and ancillary facilities in Indonesia. Incorporated a JV (East China LNG Shipping Investment Co., Ltd) with China Shipping Development 2011-02-17 Company Limited. Entered into an acquisition agreement to acquire 50% equity interest in Zhan Jiang Port Petrochemical 2011-05-27 Terminal with a total consideration of RMB332mn 2011-10-27 Completed acquisition of 50% equity interest in Zhan Jiang Port 2011-12-01 Increased the authorized share capital from HK$300mn to HK$1bn Entered into an acquisition agreement to acquire 50% interests each in four crude oil terminals (Ningbo Shihua, Qingdao Shihua, Tianjin Port Shihua, Rizhao Shihua) and 90% equity interest in Tangshan Caofeidian 2011 2011-12-03 Shihua Crude Oil Terminal from Sinopec. 2012-01-31 Entered into an acquisition agreement to acquire 50% equity interest in FOT 2012-02-29 Raised HK$3.5bn by means of Rights Issue on the basis of one Rights Share for every one existing Share Incorporated a JV (China Energy Shipping Investment Co., Ltd) with China Shipping Development Company 2012-04-12 Limited. 2012-10-09 Entered into an acquisition agreement to acquire 95% equity interest in PT. West Point, 2012 2012-10-31 Entered into an acquisition agreement to acquire 50% equity interests in in Vesta Terminals 2013-01-03 Completed the acquisition of 50% equity interests in Fujairah Oil Terminal FZC. 2013-03-19 Completed the acquisition of 95% equity interests in PT. West Point Terminal in Indonesia. 2013-04-02 Completed the acquisition of 50% equity interests in Vesta Terminals. 2013 2013-05-03 Initiated a Share Placing to issue 412.5 million shares with raised capital of HKD 2.7bn
Entered into an acquisition agreements to acquire 100% equity interest of Sinopec Yuji Pipeline which 2014 2014-12-30 contains 944.93km of Natural Gas pipeline 2015-01-30 The PNG LNG project delivered its first carrier "PUPUA" (172,000 cubic meter LNG carrier) 2015-02-10 Acquisition of Sinopec Yuji Pipeline passed the Special General Meeting
2015 2015-12-31 Completed the acquisition of 100% share interests in Sinopec Yu-Ji Pipeline Sources: Company, CMS (HK)
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Financial Summary
Balance Sheet Profit & Loss Statement HK$ mn 2014 2015 2016E 2017E 2018E HK$ mn 2014 2015 2016E 2017E 2018E Current assets 2,253 2,067 2,596 2,804 4,511 Revenues 20,670 2,044 2,246 2,350 2,463 Cash & equivalents 799 1,058 894 1,674 2,673 Cost of sales (19,754) (1,205) (1,264) (1,238) (1,287) Inventories 24 21 32 18 35 Other net income 73 55 55 55 55 Trade and other receivables 1,430 988 1,670 1,111 1,803 Distribution expenses (26) (26) (28) (29) (31) Non-current assets 16,000 15,547 15,908 15,961 16,012 Administrative expenses (150) (139) (152) (159) (167) Investment property 29 68 64 60 55 Op Profit 813 730 857 979 1,033 Property, plant & equipment 8,302 7,576 7,459 7,027 6,581 Financial costs (198) (183) (234) (295) (279) Interests in Asso/JVs 6,812 7,057 7,539 8,028 8,529 Profit of Asso/JVs 593 672 818 898 950 Other non-current assets 857 846 846 846 846 PBT 1,208 1,219 1,441 1,582 1,704 Total assets 18,252 17,614 18,504 18,764 20,523 Taxes (190) (192) (218) (239) (264) Current liabilities 1,457 4,163 3,954 3,238 4,094 Profit after tax 1,018 1,027 1,223 1,342 1,440 ST borrowings - - 2,315 2,315 2,315 Minority interests 0 (0) (0) (0) (0) Trade and other payables 1,457 4,163 1,639 923 1,779 Net profit 1,018 1,027 1,223 1,342 1,440 Non-current liabilities 4,291 4,039 4,039 4,039 4,039 EPS (HKD) 0.41 0.41 0.49 0.54 0.58 LT borrowings 4,183 3,939 3,939 3,939 3,939 Others non-current liabilities 108 100 100 100 100 Financial Ratios Total liabilities 5,748 8,202 7,993 7,278 8,133 2014 2015 2016E 2017E 2018E Issued capital 249 249 249 249 249 YoY growth rate Reserves 12,217 9,125 10,224 11,199 12,102 Revenue -11.5% -90.1% 9.9% 4.6% 4.8% Minority interests 39 39 39 39 39 Op profit 734.6% -10.2% 17.4% 14.2% 5.6% Total equity and liabilities 18,252 17,614 18,504 18,764 20,523 Net profit 107.2% 0.8% 19.1% 9.7% 7.3% Profitability Cashflow Statement OP margin 3.9% 35.7% 38.2% 41.6% 42.0% HK$ mn 2014 2015 2016E 2017E 2018E NP margin 4.9% 50.2% 54.5% 57.1% 58.5% CF from operating activities 1,113 1,475 1,072 1,183 1,516 ROE 9.1% 9.4% 12.3% 12.2% 12.1% Profit before tax 1,208 1,219 1,441 1,582 1,704 Liquidity DD&A 552 554 570 587 600 Debt to asset 22.9% 22.4% 33.8% 33.3% 30.5% Profit from Asso/JVs (593) (672) (818) (898) (950) Net debt to equity 27.1% 30.7% 51.2% 40.0% 29.0% Finance costs 219 198 255 313 313 Liquid ratio 154.6% 49.7% 65.6% 86.6% 110.2% Working capital changes (107) 364 (137) (143) 147 Quick ratio 153.0% 49.1% 64.8% 86.0% 109.3% Income tax paid (173) (176) (218) (239) (264) Operating efficiency Others 7 (12) (21) (18) (33) Asset turnover 1.4 0.1 0.1 0.1 0.1 CF from investing activities (1,417) (628) (3,172) 277 332 Inventory turnover 541.2 28.9 28.9 28.9 28.9 Capital expenditure (902) (313) (450) (150) (150) AR turnover 19.1 1.7 1.7 1.7 1.7 Other investments (515) (315) (2,722) 427 482 AP turnover 14.4 0.5 0.5 0.5 0.5 CF from financing activities (523) (551) 1,936 (680) (850) Per share ratios (HK$) Borrowings - - 2,315 - - EPS 0.41 0.41 0.49 0.54 0.58 Issue of shares - - - - - CFPS 0.32 0.43 0.36 0.67 1.08 Dividends (428) (353) (124) (367) (537) BVPS 5.01 3.77 4.21 4.60 4.97 Others (96) (198) (255) (313) (313) DPS 0.05 0.05 0.15 0.22 0.29 Net cash flow (827) 296 (164) 780 999 Valuation ratios Beg. cash 1,626 799 1,058 894 1,674 P/E 9.1 9.0 7.6 6.9 6.4 FX change (0) (38) - - - P/B 0.7 1.0 0.9 0.8 0.7 End cash 799 1,058 894 1,674 2,673 EV/EBITDA 5.9 5.9 5.2 4.7 4.5
Sources: Company data, CMS (HK) estimates
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