Equity Research September 29, 2017

Kunlun Energy Now PetroChina’s sole platform for LNG terminals

Company Update Maintain HOLD

What's new Kunlun announced plans to purchase a 51% equity interest in Jingtang Ticker 00135.HK Co. owned by PetroChina at a consideration of Rmb1.5bn, implying 1x CICC investment rating HOLD Last close HK$7.26 P/B and 18x 2016 P/E. The consideration will be settled with cash in a CICC target HK$8.50 one-off payment but it has not yet said when.

52wk price range HK$7.95~5.45 Jingtang Co. was jointly established in 2012 by PetroChina (51%), Market cap (bn) HK$59 Beijing Enterprises Group (29%) and Hebei Natural Gas Co. (20%). Daily value (mn) HK$88.32 Jingtang’s 2016 NPAT was Rmb166mn, up 26% YoY. The company Shares outstanding (mn) 8,072 mainly operates Caofeidian LNG terminal, whose capacity was Free float (%) 100 originally designed at 3.5Mt/a and now has been expanded to 6Mt/a, Daily volume (mn sh) 11.87 or 8.5bcm/a. The total LNG import volume was 2.5Mt in 2016 at 30% Business sector Oil & Gas utilization. 00135.HK HSCEI 144

Comments 133 Attractive valuation. We estimate the LNG unloading volume through 122 Caofeidian terminal (6Mt/a, or 8.5bcm/a) may grow 150% YoY in 2017 111 and the net profits of Jingtang Co. may increase 100~150% YoY to (%) Value Relative 100 Rmb330~420mn, and the portion attributable to Kunlun would thus 89 be Rmb168~214mn, 4~5% of our previous earnings forecast for 2017, Sep-2016 Dec-2016 Mar-2017 Jun-2017 Sep-2017 implying an attractive deal valuation of only 6~8x 2017e P/E. We don’t expect the cash payment will raise leverage for Kunlun (HK$ mn) 2015A 2016A 2017E 2018E considering its Rmb17bn cash on hand. Revenue 96,335 81,882 96,407 105,883 Set to benefit from stronger-than-expected gas consumption. (+/-) 100.5% -15.0% 17.7% 9.8% ’s LNG imports rose 95% YoY in July alone and 45% YoY over Net profit 1,491 659 5,173 5,857 Jan~July, and China’s apparent gas consumption was up 30% YoY in (+/-) -73.4% -55.8% 685.0% 13.2%

Aug alone and 18% over Jan~Aug. We expect 2017 apparent EPS 0.18 0.08 0.64 0.73 consumption growth to reach 20% and the growth in consumption BPS 7.65 5.07 5.64 6.17 from Northern China may be even higher considering the massive DPS 0.06 0.07 0.19 0.22 number of new residential users who will soon use gas for winter CPS 2.07 1.95 2.28 2.35 heating may consume more than expected. P/E 39.3 88.9 11.3 10.0 P/B 0.9 1.4 1.3 1.2 EV/EBITDA 6.4 7.0 4.5 4.3 Valuation and recommendation Raise our 2018 EPS 5% to HK$0.73. Our new forecast includes a Dividend yield 0.8% 1.0% 2.6% 3.0% Rmb200mn net profit contribution from Caofeidian terminal ROAA 1.1% 0.5% 3.5% 3.7% attributable to Kunlun. Lift TP 6% to HK$8.5 (12x 2018e P/E), implying ROAE 2.6% 1.3% 12.0% 12.3% 17% upside to current stock price. Maintain HOLD.

Risks Source: Wind, Bloomberg, company data, CICC Research Weaker than expected gas demand, impairment, oil price volatility.

Bin GUAN Miaozi WANG Chen LU Analyst Analyst Associate [email protected] [email protected] [email protected] SAC Reg. No.: S0080511080005 SAC Reg. No.: S0080115080056 SAC Reg. No.: S0080116120030 SFC CE Ref: AGL097 SFC CE Ref: BFJ414

Please read carefully the important disclosures at the end of this report CICC Research: September 29, 2017

Financial summary

Financial statement (HKD mn) 2015A 2016A 2017E 2018E Financial ratios 2015A 2016A 2017E 2018E Income statement Growth ability Revenue 96,335 81,882 96,407 105,883 Revenue 100.5% -15.0% 17.7% 9.8% Other ops income (expense) 0 0 0 0 Operating profit -14.0% -32.3% 101.8% 12.3% Operating profit 9,675 6,550 13,219 14,846 EBITDA -17.6% -4.8% 51.7% 9.0% Finance costs -274 -336 -525 -485 Net profit -73.4% -55.8% 685.0% 13.2% Other income (expense) 0 0 0 0 Profitability Profit before income tax 7,555 7,115 14,141 15,698 Operating margin 10.0% 8.0% 13.7% 14.0% Income tax -3,325 -3,701 -4,443 -4,739 EBITDA margin 15.1% 16.9% 21.7% 21.6% Minority interest -2,739 -2,755 -4,525 -5,102 Net margin 1.5% 0.8% 5.4% 5.5% Net profit 1,491 659 5,173 5,857 Liquidity EBITDA 14,519 13,816 20,958 22,838 Current ratio 0.95 0.68 0.80 0.70 Recurrent net income 1,491 659 5,173 5,857 Quick ratio 0.90 0.65 0.77 0.67 Balance sheet Cash ratio 0.50 0.45 0.57 0.46 Cash and bank balances 17,145 21,566 29,760 25,576 Liabilities / assets 38.0% 49.5% 48.8% 45.4% Trade and bill receivables 3,280 3,114 3,856 4,235 Net debt / equity 8.3% 18.4% 7.3% 5.5% Inventories 1,518 1,397 1,731 1,901 Return Other current assets 10,406 6,075 6,748 7,412 RoA 1.1% 0.5% 3.5% 3.7% Total current assets 32,349 32,152 42,095 39,124 RoE 2.6% 1.3% 12.0% 12.3% Fixed assets and CIP 98,878 93,488 99,224 110,058 Per-share data Intangible assets and others 11,959 13,129 13,119 13,110 EPS (HKD) 0.18 0.08 0.64 0.73 Total non-current assets 110,837 106,617 112,343 123,168 BPS (HKD) 7.65 5.07 5.64 6.17 Total assets 143,186 138,769 154,438 162,292 DPS (HKD) 0.06 0.07 0.19 0.22 Short-term borrowings 8,076 15,850 15,850 15,850 Cash flow per share (HKD) 2.07 1.95 2.28 2.35 Trade and bill payables 24,539 30,052 35,120 38,567 Valuation Other current liabilities 1,517 1,516 1,516 1,516 P/E 39.3 88.9 11.3 10.0 Total current liabilities 34,132 47,418 52,486 55,933 P/B 0.9 1.4 1.3 1.2 Long-term borrowings 16,414 17,915 19,415 14,415 EV/EBITDA 6.4 7.0 4.5 4.3 Total non-current liabilities 20,227 21,310 22,810 17,810 Dividend yield 0.8% 1.0% 2.6% 3.0% Total liabilities 54,359 68,728 75,296 73,743 Share capital 81 81 81 81 Retained profit 61,680 40,850 45,426 49,731 Equity 61,761 40,931 45,507 49,812 Total liabilities & equity 142,978 135,031 150,700 158,554 Cash flow statement Pretax profit 7,555 7,115 14,141 15,698 Depreciation & amortization 6,690 6,365 6,301 6,664 Change in working capital 1,759 1,307 3,318 2,234 Others 731 962 -5,365 -5,591 Cash flow from operations 16,735 15,749 18,396 19,005 Capital expenditure -7,375 -9,894 -11,628 -17,089 Others -42 -13,233 1,435 1,383 Cash flow from investing -7,417 -23,127 -10,193 -15,706 Equity financing -21,547 -6,730 0 0 Bank borrowings 20,338 21,208 1,500 -5,000 Others -5,703 -2,219 -1,510 -2,484 Cash flow from financing -6,912 12,259 -10 -7,484 Foreign exchange gain (loss) -1,201 -460 0 0 Net changes in cash 1,205 4,421 8,194 -4,184 Source: Company data, CICC Research

Company description

Kunlun Energy operates as PetroChina’s downstream natural gas business platform, it mainly engages in oil and gas exploration, natural gas pipeline transmission, coastal LNG terminals and onshore LNG liquefaction plant operations, as well as natural gas sales. The company is currently promoting a “gas to replace oil” strategy and is developing its LNG business. As of 2014, it had completed and commenced 752 LNG refueling stations and 321 CNG refueling stations.

Please read carefully the important disclosures at the end of this report 2 CICC Research: September 29, 2017

Figure 1: Results revisions 2017E 2018E HK$ mn Old New % chg Old New % chg Revenue 96,407 96,407 0% 104,573 105,883 1% Profit before income tax 14,141 14,141 0% 14,744 15,698 6% Net profit attributable to shareholders 5,173 5,173 0% 5,602 5,857 5% EPS, HK$ 0.64 0.64 0% 0.69 0.73 5% Source: Company data, CICC Research

Figure 2: China’s monthly apparent consumption of gas (left); China’s net monthly gas imports (right)

Rmb/cm 25.0 9.0 bcm

8.0 20.0 7.0

6.0 15.0 5.0

4.0 10.0 3.0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2014 2015 2016 2017 2014 2015 2016 2017 Source: National Bureau of Statistics, General Administration of Customs, CICC Research

Figure 3: P/E and P/B bands

20 HK$ Kunlun Energy forward P/E 20 HK$ Kunlun Energy forward P/B

16 16

12 12

8 8

4 4

0 0 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Price 10.0 x 12.0 x 14.0 x 16.0 x Price .5 x 1.0 x 1.5 x 2.0 x Source: Company data, Bloomberg, CICC Research

Please read carefully the important disclosures at the end of this report 3 CICC Research: September 29, 2017

Figure 4: Valuation of comparables Bloomberg Price Mkt. cap P/E (x) P/B (x) EV/EBITDA (X) Div. Yield ROE H share Code Curr. 29-Sep (US$bn) 16A 17E 18E 16A 17E 18E 16A 17E 18E 16A 17E 18E 16A 17E 18E BEHL(*) 0392 HK HKD 41.6 6.7 8.5 7.9 6.4 0.8 0.8 0.7 16.2 15.5 14.8 2.5% 2.7% 3.3% 9.8% 10.3% 10.1% CR Gas (*) 1193 HK HKD 27.0 7.7 17.8 14.4 12.5 3.0 2.6 2.2 10.3 9.3 8.5 1.4% 1.7% 2.0% 19.7% 19.2% 19.1% Kunlun(*) 0135 HK HKD 7.3 7.5 88.9 11.3 10.0 1.4 1.3 1.2 7.0 4.5 4.3 1.0% 2.6% 3.0% 1.3% 12.0% 12.3% ENN (*) 2688 HK HKD 56.2 7.8 17.1 15.3 13.1 3.7 3.3 2.8 10.1 9.6 8.4 1.8% 2.3% 2.7% 20.1% 19.3% 19.5% Towngas (*) 1083 HK HKD 5.4 1.9 12.6 11.8 11.0 1.1 1.0 0.9 10.3 9.8 9.2 1.8% 2.4% 2.5% 10.2% 8.2% 8.2% (*) 0384 HK HKD 22.8 14.5 26.7 22.4 20.2 5.3 4.5 3.9 27.5 20.0 17.1 1.0% 1.3% 1.5% 12.7% 19.8% 19.8% JCE (*) 0579 HK HKD 2.2 1.9 6.3 5.5 5.6 0.8 0.7 0.6 5.7 5.2 5.1 4.0% 4.6% 5.0% 11.6% 12.0% 10.9% China Oil & Gas 0603 HK HKD 0.5 0.4 7.8 9.1 7.9 1.0 0.9 0.8 5.7 6.2 5.6 0.9% 0.9% 1.1% 12.8% 11.7% 12.3% HKCG 0003 HK HKD 14.7 26.3 27.0 26.5 25.3 3.5 3.4 3.3 25.1 23.6 22.4 2.2% 2.4% 2.5% 13.3% 13.4% 13.5% Suntien (*) 0956 HK HKD 1.9 0.9 14.6 8.7 7.4 0.8 0.7 0.6 12.1 9.8 8.4 2.3% 5.1% 5.7% 6.0% 9.8% 10.3% Zhongyu Gas 3633 HK HKD 5.7 0.7 16.2 14.2 12.5 1.6 1.6 1.4 9.8 8.5 7.1 n.m. 2.1% 2.5% 17.2% 14.8% 15.1% Average 22.1 16.1 12.2 2.1 1.8 1.6 12.7 11.2 10.2 2.0% 2.4% 2.5% 11.2% 12.5% 12.6%

A share Shaanxi Nat.Gas 002267 CH RMB 8.3 1.4 16.1 17.4 15.7 n.m 1.7 1.5 n.m n.m n.m n.m. n.m. n.m. 11.5% 7.5% 8.0% Shenzhen Gas (*) 601139 CH RMB 8.6 2.9 24.8 23.2 17.7 2.4 2.2 2.0 14.2 13.0 10.6 1.5% 2.0% 2.6% 11.7% 11.3% 11.7% Chongqing Gas 600917 CH RMB 9.0 1.8 34.7 36.1 32.3 3.3 3.2 3.0 20.6 22.2 20.7 1.7% 1.6% 1.6% 9.4% 9.5% 9.4% Changchun Gas 600333 CH RMB 6.9 0.5 n.m n.m n.m n.m n.m n.m n.m n.m n.m n.m. n.m. n.m. n.m. n.m. n.m. Shenergy 600642 CH RMB 6.0 3.5 14.9 15.7 14.9 n.m n.m n.m n.m n.m n.m n.m. n.m. n.m. 7.7% 8.0% 8.0% Xin Gas 603393 CH RMB 37.0 0.8 n.m n.m n.m n.m n.m n.m n.m n.m n.m n.m. n.m. n.m. n.m. n.m. n.m. Average 23.7 24.9 18.6 4.0 2.8 2.5 187.7 17.0 13.2 1.8% 1.7% 1.9% 12.6% 11.7% 12.7%

American ONEOK OKE US USD 54.9 20.9 32.4 29.1 22.0 265.4 3.5 4.4 16.2 15.6 14.1 4.5% 5.2% 5.8% 118.2% 19.2% 17.2% Atmos Energy ATO US USD 83.6 8.9 25.2 23.1 21.8 2.4 2.3 2.2 12.7 11.6 10.8 2.0% 2.2% 2.3% 10.3% 10.4% 10.3% WGL Holdings WGL US USD 84.2 4.3 26.6 26.2 24.0 3.2 3.8 3.5 14.2 12.8 11.8 2.3% 2.4% 2.5% 12.0% 11.6% 12.8% NiSource, Inc. NI US USD 25.3 8.2 23.4 21.3 20.1 2.0 1.9 1.8 11.3 10.7 9.8 2.6% 2.8% 2.9% 8.9% 9.2% 9.1% TransCanada TRP CT CAD 61.7 43.2 22.5 20.3 18.6 2.4 2.5 2.4 15.5 13.7 12.4 3.6% 4.0% 4.3% 11.8% 14.3% 15.2% Enbridge ENB CT CAD 51.9 68.6 22.6 25.1 20.1 2.0 1.4 1.4 24.6 16.3 13.8 4.1% 4.7% 5.1% 9.8% 9.6% 9.9% Average 25.5 24.2 21.1 46.2 2.6 2.6 15.8 13.4 12.1 3.2% 3.5% 3.8% 28.5% 12.4% 12.4% Source: Company data, Bloomberg, CICC Research * :indicates use of CICC forecasts ;all others use market consensus

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