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Company Report Hong Kong Equity Research 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$5.14 based on sector P/B-ROE, which implies 2016E of P/E of 10.4x or P/B of 1.2x. Catalysts and risks We believe that key catalysts include: 1) further injection of storage and logistics assets from Sinopec; 2) higher-than-expected crude oil imports; and 3) faster-than-expected recovery in domestic natural gas consumption. Meanwhile, we expect key risks to be 1) delay in capacity upgrade in Rizhao Port; 2) lower gas demand in Shandong due to increasing LNG imports; and 3) operation risks for overseas projects To access our research reports on the Bloomberg terminal, type CMHK <GO> 2 Monday, May 30, 2016 Focus charts Figure 1: Throughput volume to reach 244mt in 2018E Figure 2: Natural gas transmission volume to recover with capacity utilization up to 83% from low base in 2015 mt Throughput volume Capacity utilization % bcm Shaanxi Shanxi Henan/Hebei Shandong 260 100 4.0 240 80 220 3.0 200 60 2.0 180 40 160 1.0 20 140 0.0 120 - 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates Figure 3: Net profit to grow at solid 12% CAGR in Figure 4: Robust gross cash underpins future increase 2015-18E in dividend Crude oil jetty services NG pipeline HK$ 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 To access our research reports on the Bloomberg terminal, type CMHK <GO> 3 Monday, May 30, 2016 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 ................................................
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