Company Report Hong Kong Equity Research

Monday, May 30, 2016

China Merchants Securities (HK) Co., Ltd.
Hong Kong Equity Research

Company Report

Anna YU

Sinopec Kantons (934 HK)

Oil & gas logistics platform to thrive on volume growth

+852 6226 8956

■ 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 (Potential up/downside)

We expect China crude oil imports to grow at solid 7% CAGR in 2015- 20E underpinned by lower domestic production, inventory build-up and higher non-state crude oil import quota. Thanks to robust China crude oil imports, we expect the throughput volume in Sinopec Kantons’ 7 domestic crude oil terminals to increase from 187mt in 2015 to 244mt in 2018E, representing a CAGR of 9% during the period with overall utilization up from 69% in 2015 to 83% in 2018E.

HK$5.14 (+38%)

Price Performance

(%)

934

10

HSI Index

0
-10 -20 -30 -40 -50 -60

Gas transmission volume to recover from low base

The newly acquired Yu-Ji Pipeline reported a 7.8% YoY decline in transmission volume to 3.0bcm in 2015, mainly due to 37% YoY plunge in volume to Shandong given increased LNG imports in the area upon the operation of Qingdao LNG terminal as at the end of 2014. We expect the transmission volume to rebound by a moderate 12% YoY to 3.3bcm in 2016E underpinned by increased natural gas demand upon the cut in city-gate gas price on November 2015. We expect overall transmission volume to grow at 9% CAGR in 2015-18E and reach 3.9bcm in 2018E.

May/15

Sep/15

Jan/16

Apr/16

Source: Bigdata

%934 HK HSI
1m (13.1) (4.7)
6m (12.9) (9.3)
12m (47.9) (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% earnings CAGR on natural gas pipeline transmission business. These core busiensses are expected to account for 72% and 31% of total profit in 2018E versus 78% and 25% in 2015. Meanwhile, we expect improved overseas logsitics business to be offset by increased interest expenses upon the completion of pipeline acuqisition. Our 2016E-17E earnings projection is 4-5% higher than market consensus.

Oil and Gas

Hang Seng Index HSCEI
20577
8526

Key Data

52-week range (HK$) Market cap (HK$ mn) Avg. daily volume (mn) BVPS (HK$)
3.38-7.04
9249 3.33 3.77

P/E at significant discount to its peers

Shareholding Structure

Sinopec National Council for Social Security Fund ICBC Credit Suisse Asset Management No. of shares outstanding (mn) Free float
60.33%
5.99%
5.9%

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. Sinopec Kantons is trading at 2016E P/E of 7.6x or P/B of 0.9x, both 53-62% discount to its gloal peers which we believe is attractive given its solid earnings growth outlook.

2486 48.44

Financials

RMB mn

2014

2015

2016E

2017E

2018E

Revenue Growth (%) Net profit Growth (%) EPS (RMB) DPS (RMB) P/E (x)
20,670 -11.5%
1,018
107.2%
0.41
2,044
-90.1%
1,027 0.9% 0.41
2,246 9.9% 1,223 19.1%
0.49
2,350 4.6% 1,342 9.7% 0.54
2,463 4.8% 1,440 7.3% 0.58

0.05

0.15

0.22

0.29

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

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

To access our research reports on the Bloomberg terminal, type CMHK <GO>

2

Focus charts

Figure 1: Throughput volume to reach 244mt in 2018E with capacity utilization up to 83%
Figure 2: Natural gas transmission volume to recover from low base in 2015

mt

%

Throughput volume

Capacity utilization

Shaanxi

Shanxi

Henan/Hebei

Shandong

bcm

260

100

4.0

240

220 200 180 160 140 120
80 60 40 20 -
3.0 2.0 1.0 0.0

2014

2015

2016E

2017E

2018E

2013

2014

2015

2016E 2017E 2018E

Sources: Company, CMS (HK) estimates

Figure 3: Net profit to grow at solid 12% CAGR in 2015-18E
Figure 4: Robust gross cash underpins future increase in dividend

Crude oil jetty services Overseas
NG pipeline Others

HK$ mn

3,000

Cash

Net profit

Dividend

HK$ mn

Total net profit
1,600
2,500

2,000 1,500 1,000
500
1,200
800 400
0
0

2012

2013

2014

2015 2016E 2017E 2018E

(400)

2012 2013 2014 2015 2016E 2017E 2018E

Sources: Company, CMS (HK) estimates

Figure 5: Sinopec Kantons is attractive based on P/B vs. ROE framework

Sources: Bloomberg, CMS (HK) estimates

3

Contents

Crude oil imports to grow at solid 7% CAGR in 2015-20E Largest crude oil terminal operator in China to benefit from robust oil imports Possible M&As support future expansion
6
10 13

Newly acquired pipeline assets to explore natural gas transmission business................................................. 14

Acquisition completed in December 2015 with attractive valuation Gas transmission volume to recover from low base in 2015 Limited risk on transmisson tariff cut given reasonable return Large size of pipeline assets held by Sinopec to underpin future M&As
14 15 17 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 Consolidated revenue and cost only reflects part of businesses Possible increase in dividend payout given robust cash on hand
19 19 20

4

Figure 6: Valuation comparison

Bloomberg

Mark.

Cap

P/E

P/B

ROE

Dividend Yield

Code

Price

LC
2016E x
2017E x
2016E x
2017E x
2016E
%
2017E
%
2016E
%
2017E
USD mn

1,191

%

Sinopec Kantons* China Ports (H share)

China Merchants Dalian Port

934 HK

3.72

7.6

6.9

0.9

0.8

12.3

12.2

4.0

5.8

144 HK
2880 HK 1199 HK 3382 HK 3378 HK
21.60
3.19 7.84 1.09 1.45
7,230 3,685 2,995
864
12.8 27.2 10.1
7.3
11.9 29.0 10.0
6.8
0.9 0.9 0.6 0.5 0.6

0.7

0.8 0.9 0.6 0.5 0.6

0.7

7.2 3.2 6.0 7.6 6.6

6.1

7.5 3.1 5.9 7.7 6.7

6.2

3.7 1.1
3.9 1.5 4.0 5.5 4.1

3.8

COSCO Pacific Tianjin Port
14.6
5.5
Xiamen Port

Average

509

9.8

9.1

4.1

3,057

13.4

5.8

China city-gas

Beijing Enterprises China Gas
392 HK 384 HK
39.45 10.84
6.26
6,454 6,856 6,508 6,173 5,227 1,411

5,438

7.9
14.8 12.9 14.0 11.8
8.6
7.5
12.4 10.1 12.6 10.5
8.2
0.8 2.6 0.9 2.4 2.1 0.8

1.6

0.7 2.2 0.9 2.1 1.9 0.7

1.4

10.4 18.5
8.0
10.1 19.6
8.6
2.9 1.6 1.8 1.7 2.5 2.9

2.2

3.2 2.1 2.4 2.0 2.8 3.1

2.6

Kulun Energy CR Gas
135 HK
1193 HK 2688 HK 1083 HK
21.55 37.50
4.11
17.8 19.5
8.6
17.3 18.8
8.6
ENN Energy Towngas China

Average

11.7

10.2

13.8

China Ports (A share)

Shanghai Port Ningbo Port
600018 CH 601018 CH 601880 CH 600717 CH 600017 CH
5.07 5.41 5.39 8.68 4.13
17,907 10,554
3,685 2,216 1,936

7,260

17.0 25.4 59.9 N/A
16.4 25.0 53.9 N/A
1.9 2.0 1.9 0.9 1.2

1.6

1.7 1.9 1.9 0.9 1.2

1.5

10.8
7.8 3.3 8.8 2.8

6.7

10.8
7.5 3.4 8.9 3.2

6.8

3.1 1.2 0.4 2.8 N/A

1.9

3.3 1.2 0.4 2.9 N/A

1.9

Dalian Port Tianjin Port

Rizhao Port

31.5

33.4

27.0

30.6

Average

Global ports

DP World

DPW DU

ADSEZ IN HPHT SP ICT PM
18.10
192.45
0.44
15,023
5,952 3,833 2,551 1,774 1,217
355
16.1 15.7 17.9 18.7 33.9 19.9 10.8

19.0

13.8 14.2 19.1 16.7 30.1 16.4
8.8
1.6 3.0 0.7 1.9 3.0 2.0 0.9

1.9

1.4 2.5 0.7 1.9 2.9 1.9 1.0

1.8

10.3 20.9
3.8
10.8 19.0
3.6
1.8 0.8 9.2 1.5 2.6 3.8
11.8

4.5

2.0 0.9 8.4 1.6 2.8 4.1 5.4

3.6

Adani Port Hutchison Port Intl Container Term Services Port of Tauranga Hamberger Hafen Piraeus Port

Average

58.50 19.35 14.97 12.69
10.9
8.7
11.7

9.7

POT NZ

HHFA GR PZE GR
10.3 N/A

10.8

12.5 N/A

11.2

4,386

17.0

Global oil storage and logistics

Kinder Morgan Magellan Mistream Buckeye
KMI US MMP US BPL US SXL US VPK NA NS US
17.92 70.08 72.81 28.09 47.25 48.66 30.90
1.66
39,989 15,963
9,487 8,306 6,750 3,790
317
26.9 20.2 17.8 31.8 17.4 21.3
4.1
23.0 18.5 16.9 19.0 17.4 19.7
3.4
1.1 7.6 2.6 1.0 2.5 2.6 0.4 0.7

2.3

1.1 7.5 2.6 1.0 2.3 2.9 0.4 0.7

2.3

4.2
38.7 14.8
3.3
5.1
39.4 N/A
2.8 4.7 6.7 7.1 2.3 9.0
-
2.8 5.1 7.0 7.7 2.4 9.0
-

Sunoco

5.2

Vopak

17.4

11.3 11.2 (3.2)

12.2

13.5

N/A