China Oil & Gas Sector

12 January 2017 Asia Pacific/Hong Kong Equity Research Energy

China Oil & Gas Sector Research Analysts SECTOR FORECAST Horace Tse 852 2101 7379 [email protected] 2017: A year of second-phase recovery Jessie Xu 852 2101 7650 [email protected] Figure 1: Chinese Oils typically see expansion of multiples during upcycle (Rebased to 100) EV/EBITDA (x) 300 6.5 6.0 250 Oil price trend - 2016-17 vs 2009-11 5.5 +1STD: 5.3x 5.0 200 4.5 Avg: 4.2x 4.0 150 3.5 3.0 -1STD: 3.2x 100 2.5 CNOOC 2.0 50 1.5 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-16 Jul-16 Jan-17 Jul-17

Source: the BLOOMBERG PROFESSIONAL™ service, company data, Credit Suisse estimates

■ Accelerated oil market rebalancing post OPEC deal. We believe the OPEC cut effective from January, coupled with robust 1.5mb/d global oil demand growth, should induce 400mbs of inventory drawdown in 2017 and accelerate the global oil market rebalance. CS forecasts US$56/bbl Brent in 2017, with upside risk if OPEC adheres to the 32.5mb/d low-end output cut. Since the announcement of the OPEC deal, oil prices were up 22% and global peers have rallied 12%, but Chinese Oils, particularly CNOOC, have lagged. We expect a reversal of the underperformance trend. ■ Multiple catalysts ahead. (1) We think the market is too bearish on CNOOC’s production/reserves and its upcoming 2017 Strategy Preview could surprise on the upside. (2) Sinopec’s marketing business divestment could be the biggest catalyst this year; latest comps and recent transactions suggest 20x P/E valuation for the marketing business. We raise the marketing business valuation to 18x P/E (from 14x) in our Sinopec model. ■ Valuation rerating during an oil price upcycle. The Big 3 Oils are pricing in 4.5x 2017E EV/EBITDA at our US$56/bbl assumption, >1 SD below the historical average. During the 2009-11 upcycle, the Big 3 Oils’ EV/EBITDA multiples rerated from 3x to 6x on average. In terms of implied oil prices, Sinopec is one of the lowest within the region at US$55/bbl long-term oil price, vs Asia Oils’ average of US$60 and CS’s long-term oil price assumption of US$65. ■ Pecking order: CNOOC > Sinopec > PetroChina. CNOOC (upgrade to Outperform, TP HK$12.8) is the most leveraged to oil price recovery, cheap and has significantly underperformed global peers, with the 2017 Strategy Preview as a near-term catalyst. Sinopec (upgrade to Outperform, TP HK$7.3) should see valuation/earnings upside from its marketing business, plus tailwinds from a prolonged chemical upcycle. PetroChina (Neutral, TP HK$7.0) has priced in a lot of expectations on the gas pipeline revaluation potential so upside is limited. Please see the company pages at the back for the other ratings, TP and EPS changes made.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

12 January 2017

Focus table and charts

Figure 2: Credit Suisse oil price forecasts—base case and bull case (US$/bbl) 2014 2015 2016 1Q17E 2Q17E 3Q17E 4Q17E 2017E 2018E 2019E LT Base case Brent 98.9 52.4 44.0 46.0 56.0 61.0 62.0 56.3 65.0 65.0 65.0 WTI 93.1 48.8 43.2 45.0 55.0 60.0 60.0 55.0 62.5 62.5 62.5 Bull case Brent 98.9 52.4 44.0 61.0 66.0 71.0 72.0 67.5 65.0 65.0 65.0 WTI 93.1 48.8 43.2 60.0 65.0 70.0 70.0 66.3 62.5 62.5 62.5 Source: Credit Suisse Global Energy Team estimates

Figure 3: Oil supply and demand (3 mma, mb/d) Figure 4: Global oil inventory stock change (mbs)

Source: IEA, JODI, EIA, Petrologistics, BP, Country data, Credit Suisse Global Energy Team Source: IEA, JODI, EIA, Petrologistics, BP, Country data, Wood Mackenzie, Credit Suisse Global Energy Team estimates

Figure 5: Chinese Oils have significantly Figure 6: CNOOC has witnessed a massive rerating underperformed oil price and global peers during the last oil upcycle

25% EV/EBITDA (x) Performance since 30 Nov 2016 6.5 20% (OPEC deal announcement) 6.0 15% 5.5 +1STD: 5.3x 10% 5.0 5% 4.5 Avg: 4.2x 0% 4.0 -5% 3.5

BP 3.0 -1STD: 3.2x

ENI

PTT

Total

Hess

Brent

Japex

Statoil Repsol

PTTEP 2.5

Sinopec

CNOOC

Chevron Reliance

Anadarko CNOOC Oil Search Oil PetroChina 2.0

ConocoPhillips 1.5 Royal Dutch Shell Dutch Royal Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: Company data, Credit Suisse research

Figure 7: Latest comps and recent transactions suggests higher valuation for Sinopec’s Marketing Figure 8: Asia Oils—implied LT oil price comparison

P/E (x) (US$/bbl) 25 80 22 Sinopec $70 20 70 $65 20 18 $60 $62 16 60 $55 $57 14 $50 15 50

10 40

30 5 20 - 10 US C-Store Caltex Australia BP-Woolworths 2014 sell-down CS current peers transaction implied assumed - valuation valuation PTTEP Sinopec OGDC CNOOC PetroChina ONGC Oil India

Source: I/B/E/S, company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 2 12 January 2017

2017: A year of second-phase recovery Accelerated oil market rebalancing post OPEC deal $56/bbl CS base case In our view, the OPEC cut effective from 1 January 2017, coupled with robust 1.5mb/d 2017 forecast (Brent) global oil demand growth, should induce 400mbs of inventory drawdown in 2017 and accelerate the rebalance of the global oil market. CS' Global Energy Team forecasts US$56/bbl Brent for 2017, but acknowledges that there could be upside risk to oil prices should OPEC adhere to the 32.5mb/d low-end of the agreed cut. Despite oil prices going up 22% since OPEC struck the deal in November 2016, the Big 3 Oils’ underperformance is significant, particularly CNOOC. CNOOC is down 1% since then, having hugely underperformed global peers and consistent with our Underperform stance; Sinopec and PetroChina are up 9% and 17%, respectively. We expect a reversal of the underperformance trend, with multiple catalysts in sight. Multiple catalysts ahead We expect fundamental We expect company-specific catalysts to drive share prices, on top of an oil price share price drivers over recovery: (1) The market is concerned about CNOOC’s deteriorating production and low the course of 2017 on reserve life, and expectations are low heading into the 2017 Strategy Preview, but we top of an oil price believe it should bring positive surprises. Its 2017 production decline should be limited to uptick low single digits vs market expectations of a 5-8% decline. Two mega-size discoveries recently announced by its partner, ExxonMobil, suggests successful exploration effort under a low capex environment and will address concerns on its low reserve life. (2) Sinopec's marketing business divestment, which is coherent with the SOE reform that China is re-emphasising, would be a big catalyst for this year. Latest comps and recent transactions suggest 20x P/E valuation for the marketing business; hence, we raise the marketing business valuation to 18x P/E (from 14x) in our Sinopec model. Over the next 6- 9 months, we expect Sinopec to see further development and collaboration on its non-fuel business. Valuation rerating during an oil price upcycle EV/EBITDA multiples Under our US$56/bbl base-case oil price assumption, the Big 3 Oils are currently pricing in expanded from 3x to 6x 4.5x 2017E EV/EBITDA, which is more than 1 SD below the historical average. Our during the 2009-11 analysis of the past oil cycles suggests that during the 2009-11 recovery, the Big 3 Oils’ upcycle EV/EBITDA multiples have rerated from 3x to 6x on average. In terms of implied oil prices, Sinopec is one of the lowest within the region at US$55/bbl long-term oil price, vs Asia Oils’ average of US$60/bbl and CS’s long-term oil price assumption of US$65/bbl. Pecking order: CNOOC > Sinopec > PetroChina ■ CNOOC (0883.HK, OUTPERFORM, TP HK$12.8): We upgrade CNOOC to an OUTPERFORM (from Underperform) and raise our TP to HK$12.8 (from HK$7.0). CNOOC is the highest leveraged to an oil price recovery given its lowest all-in cost (US$38/boe). At 4x 2017E EV/EBITDA, the stock is cheap relative to its own history and global E&P peers. The 2017 Strategy Preview would be a near-term catalyst. ■ Sinopec (0386.HK, OUTPERFORM, TP HK$7.3): We upgrade Sinopec to OUTPERFORM (from Neutral) and raise our TP to HK$7.3 (from HK$6.1). Its marketing business sell-down targeted for 2H17 would be a market focus throughout the year, and we expect plentiful newsflow on further non-fuel business collaborations. The prolonged chemical upcycle should benefit Sinopec the most, where US cracker capacity additions continue to face start-up delays and are pushed out to 2018/19. ■ PetroChina (0857.HK, NEUTRAL, TP HK$7.0): We raise our PetroChina TP to HK$7.0 (from HK$6.3) while retaining our NEUTRAL rating. We think the market has priced in a lot of expectations on the gas pipeline revaluation potential so further upside is limited, in our opinion. Our TP already factors in HK$5.8/sh of pipeline valuation, where we have benchmarked Sinopec’s implied valuation (20x P/E and 2.3x asset), higher than the 14x P/E implied valuation from PetroChina’s revaluation in Dec-2015.

China Oil & Gas Sector 3

Sector Gas Oil & China Sector valuation

Figure 9: Valuation comparison—China oil and gas companies under CS coverage (priced as of 10 Jan 2017) Up/(dn) Mkt cap P/E (x) EV/EBITDA (x) P/B (x) ROE (%) Div. yld Net D/E Share price performance (%) Company Ticker FX Rat. Price TP vs TP (US$ mn) 16E 17E 18E 16E 17E 18E 17E 17E 18E 17E 17E 1M 3M 6M 12M YTD

Large-caps PetroChina - H 0857.HK HKD N 6.18 7.00 13% 213,248 234.0 72.4 22.7 7.6 6.9 6.0 0.98 1.4% 4.2% 0.8% 39% 13% 16% 13% 41% 7% PetroChina - A 601857.SS RMB U 8.40 6.60 -21% 213,248 356.2 110.2 34.6 7.6 6.9 6.0 1.49 1.4% 4.2% 0.5% 39% 11% 15% 14% 8% 6% Sinopec - H 0386.HK HKD O 5.90 7.30 24% 100,835 11.3 10.0 8.7 5.5 4.6 4.3 0.84 8.4% 9.3% 5.0% 15% 6% 4% 2% 40% 7% Sinopec - A 600028.SS RMB O 5.90 6.90 17% 100,835 12.6 11.2 9.7 5.5 4.6 4.3 0.95 8.4% 9.3% 4.5% 15% 8% 20% 21% 26% 9% CNOOC 0883.HK HKD O 9.73 12.80 32% 56,020 270.9 16.0 9.2 7.4 4.9 4.2 1.08 6.7% 12.7% 2.4% 15% -5% -4% -1% 38% 0% OFS and Engineering COSL - H 2883.HK HKD O 7.62 9.00 18% 7,364 (3.6) 34.4 27.1 19.0 11.7 10.6 0.85 2.5% 3.1% 0.6% 57% 0% 1% 20% 40% 6% COSL - A 601808.SS RMB U 13.06 8.50 -35% 7,364 (6.8) 66.0 52.1 19.0 11.7 10.6 1.64 2.5% 3.1% 0.3% 57% 1% 6% 2% -4% 2% COOEC 600583.SS RMB O 7.71 9.00 17% 4,923 18.1 16.2 12.0 13.8 7.8 6.1 1.30 8.1% 10.0% 1.2% Net cash 5% 10% 3% 1% 4% Sinopec SSC - H 1033.HK HKD U 1.51 1.00 -34% 7,731 (1.9) (9.4) (28.9) (12.9) 17.2 12.1 1.53 -16.3% -5.6% 0.0% 194% -4% -3% -3% -16% 0% Sinopec SSC - A 600871.SS RMB U 4.21 0.80 -81% 7,731 (5.9) (29.4) (90.1) (12.9) 17.2 12.1 4.78 -16.3% -5.6% 0.0% 194% 6% 7% 0% -37% 3% Sinopec Engineering 2386.HK HKD U 6.33 5.30 -16% 3,614 10.9 9.8 10.1 4.5 4.0 4.1 0.92 9.4% 8.6% 4.1% Net cash -4% -6% -13% 5% -2% Yantai Jereh 002353.SZ RMB N 20.79 21.00 1% 2,876 194.8 128.4 113.4 154.3 73.3 55.9 2.49 1.9% 2.2% 0.2% Net cash 3% 8% 5% 17% 2% Anton Oil 3337.HK HKD N 1.13 1.10 -3% 355 (17.8) 247.1 45.7 17.5 12.0 10.2 1.25 0.5% 2.7% 0.0% 53% 2% 28% 41% 77% 4% SPT Energy 1251.HK HKD N 0.72 0.80 11% 143 (11.6) 72.0 14.7 22.6 5.7 3.6 0.93 1.3% 6.0% 0.0% 30% 4% 16% 36% 20% 11% Hilong 1623.HK HKD O 2.09 2.50 20% 457 21.2 14.5 12.1 7.9 6.8 6.2 0.95 6.5% 7.4% 1.4% 44% -14% 34% 135% 74% -7% Kunlun Energy 0135.HK HKD U 6.00 4.90 -18% 6,246 10.7 12.1 9.5 3.4 3.7 3.2 0.92 7.6% 9.0% 2.5% 41% 4% 1% 2% 5% 3% Sinopec Kantons 0934.HK HKD O 3.53 5.10 44% 1,132 8.2 6.5 5.7 10.4 8.9 7.8 0.77 11.8% 12.2% 2.6% 45% -1% -6% -13% -17% 0% Chemicals Sinopec SPC - H 0338.HK HKD O 4.43 5.50 24% 9,160 8.4 9.7 10.8 7.9 9.2 10.2 1.46 15.0% 11.9% 3.4% Net cash 8% 13% 16% 44% 5% Sinopec SPC - A 600688.SS HKD U 6.79 4.20 -38% 9,160 14.3 16.7 18.6 7.9 9.2 10.2 2.50 15.0% 11.9% 2.0% Net cash 11% 14% 7% 21% 5% Wanhua Chemical 600309.SS RMB O 23.58 28.40 20% 7,364 14.3 12.2 11.2 9.7 8.6 8.1 2.64 21.6% 19.0% 2.5% 110% 18% 12% 32% 50% 10% Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM. Source: Company data, Thomason Reuters, Credit Suisse estimates

12 January 2017 January 12

China Oil & Gas Sector 4

Sector Gas Oil & China Figure 10: China oil and gas sector—summary of ratings/TP/earnings changes Rating TP (HK$/sh) 2017 EPS (Rmb/sh) 2018 EPS (Rmb/sh) Company Ticker New Old Chg New Old Chg Up/(dn)side New Old Chg New Old Chg PetroChina - H 0857.HK N N - 7.00 6.30 11% 13% 0.08 -0.04 n/m 0.24 0.24 0% PetroChina - A 601857.SS U U - 6.60 5.60 18% -21% 0.08 -0.04 n/m 0.24 0.24 0%

Sinopec - H 0386.HK O N  7.30 6.10 20% 24% 0.53 0.45 16% 0.61 0.52 17% Sinopec - A 600028.SS O N  6.90 5.30 30% 17% 0.53 0.45 16% 0.61 0.52 17% CNOOC 0883.HK O U  12.80 7.00 83% 32% 0.54 0.51 7% 0.94 0.92 3% COSL - H 2883.HK O O - 9.00 10.00 -10% 18% 0.20 0.20 0% 0.25 0.25 0% COSL - A 601808.SS U U - 8.50 8.70 -2% -35% 0.20 0.20 0% 0.25 0.25 0% Sinopec SSC - H 1033.HK U U - 1.00 1.00 0% -34% -0.14 -0.23 n/m -0.05 -0.10 n/m Sinopec SSC - A 600871.SS U U - 0.80 0.80 0% -81% -0.14 -0.23 n/m -0.05 -0.10 n/m Sinopec Engineering 2386.HK U U - 5.30 5.30 0% -16% 0.58 0.59 -1% 0.56 0.57 -2% Yantai Jereh 002353.SZ N N - 21.00 20.00 5% 1% 0.16 0.12 31% 0.18 0.14 35% Anton Oil 3337.HK N U  1.10 0.50 120% -3% 0.00 -0.05 n/m 0.02 -0.03 n/m SPT Energy 1251.HK N N - 0.80 0.50 60% 11% 0.01 0.01 0% 0.04 0.04 0% Hilong 1623.HK O O - 2.50 1.80 39% 20% 0.13 0.12 4% 0.15 0.15 3% Kunlun Energy* 0135.HK U U - 4.90 4.80 2% -18% 0.49 0.54 -9% 0.63 0.72 -13% Sionpec Kantons* 0934.HK O O - 5.10 5.00 2% 44% 0.54 0.47 14% 0.62 0.54 16% Sinopec SPC - H 0338.HK O O - 5.50 4.80 15% 24% 0.41 0.38 8% 0.37 0.36 2% Sinopec SPC - A 600688.SS U U - 5.20 4.20 24% -23% 0.41 0.38 8% 0.37 0.36 2% Wanhua Chemical 600309.SS O O - 28.40 26.00 9% 20% 1.93 1.92 1% 2.10 2.06 2% * Kunlun Energy and Sinopec Kantons' EPS in HK$, others in Rmb/sh. A-share TPs in Rmb/sh, others in HK$. O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM. Priced as of 10 Jan 2017. Source: Company data, Thomson Reuters, Credit Suisse estimates

12 January 2017 January 12

China Oil & Gas Sector 5 12 January 2017

Table of contents

2017: A year of second-phase recovery 3

Sector valuation 4

Accelerated oil market rebalancing post OPEC deal 7

Multiple catalysts ahead 20

Valuation rerating during an oil price upcycle 28

Pecking order: CNOOC>Sinopec>PetroChina 31

Appendix I: Oil sub-sectors—performance over historical oil cycles 33

Appendix II: Global oil demand-supply balance 36

CNOOC (0883.HK / 883 HK) 39

Sinopec 41

PetroChina 43

COSL (2883.HK / 2883 HK) 45

Sinopec Shanghai Petrochemical (0338.HK / 338 HK) 47

Sinopec Kantons 49

Kunlun Energy (0135.HK / 135 HK) 51

Sinopec Engineering (2386.HK / 2386 HK) 53

Sinopec SSC (1033.HK / 1033 HK) 55

Hilong (1623.HK / 1623 HK) 57

Anton Oil (3337.HK / 3337 HK) 59

SPT Energy (1251.HK / 1251 HK) 61

Wanhua Chemical (600309.SS / 600309 CH) 63

Yantai Jereh (002353.SZ / 002353 CH) 65

China Oil & Gas Sector 6 12 January 2017

Accelerated oil market rebalancing post OPEC deal Chinese Oils have significantly underperformed global peers since the OPEC deal After OPEC announced a surprise output cut in Vienna on 30 November 2016—the first collective effort by the cartel over the past eight years—this marked the end of a dark sub- US$40/bbl era and presents a game changer for the oil market. Brent and WTI both rallied above US$50/bbl (vs a trough of US$26/bbl in January 2016) at the time of writing, setting the stage for a full-fledged oil price recovery in 2017. However, the share price performances for global oil companies suggest that equity investors do not believe that the OPEC cartel can get their act together. Despite oil prices going up 22% since OPEC struck the deal, global integrateds and E&Ps have risen along with the oil price uptick, while the Big 3 Oils’ underperformance is significant particularly CNOOC—CNOOC is actually down 1% since then, while Sinopec and PetroChina are up 9% and 17%, respectively, partly lifted by Sinopec’s Sichuan-East gas pipeline transaction announced in late December. This underperformance, in our view, is unjustified.

Figure 11: Price performance since 30 Nov 2016— Figure 12: Price performance since 30 Nov 2016— PetroChina/Sinopec vs Global and Asia integrateds CNOOC vs Global and Asia E&Ps

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%

-5%

ENI

PTT

Total

Hess

Brent

Statoil

Brent

Repsol

Inpex

Japex

Sinopec

ONGC

Chevron

Santos

Reliance

PTTEP

Encana

CNOOC

Anadarko

PetroChina

Woodside

ExxonMobil

Oil Search Oil

ConocoPhillips

Noble Energy Noble Royal Dutch Shell Dutch Royal Resources EOG Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Oil finally out of the woods Factoring in our forecast of continued strong above-trend demand and decelerating supply growth figures, we expect oil prices to track higher through 2017. Our base-case oil price forecast is for US$56/bbl (Brent) average for 2017, but with an upside risk. We expect the Vienna deal to stick around for the first half this year and broad growth declines in Nopexus (excluding Canada, Russia Kazakhstan and Brazil), implying marginal global supply growth at 0.2mb/d (+0.2% YoY) this year. On the demand side, we expect above- trend growth of 1.5mb/d (+1.5% YoY) globally, surpassing supply growth, supported by favourable global economic growth.

China Oil & Gas Sector 7 12 January 2017

Figure 13: Abbreviated CS base case oil balance CS Model 3Q16 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E Supply (mb/d) 96.2 97.7 96.6 96 95.6 97.2 98.2 96.7 YoY -0.4 0.6 0.1 -1.1 0.1 1 0.5 0.1 OPEC 14 39.9 40.8 40 39.7 39.8 41 41.3 40.5 YoY 0.7 1.5 1 0 0.2 1.1 0.5 0.5 Non-OPEC (includes processing gains) 56.2 56.9 56.6 56.3 55.8 56.1 56.9 56.3 YoY -1.1 -0.9 -0.9 -1.1 -0.2 -0.1 0.1 -0.3 Demand (mb/d) 96.9 97.6 96.4 97.1 96.8 98.4 99 97.8 YoY 1.1 1.8 1.6 1.4 1.2 1.5 1.4 1.4 OECD 47.2 47.2 46.8 47 46.3 47.6 47.6 47.1 YoY 0.3 0.8 0.4 0.3 0.3 0.4 0.4 0.3 Non-OECD 49.6 50.4 49.6 50 50.5 50.8 51.4 50.7 YoY 0.8 1 1.2 1.1 0.9 1.2 1 1.1 Implied inventory change (mb/d) -0.6 0.1 0.2 -1.0 -1.2 -1.1 -0.8 -1.1 Call on OPEC crude 33.9 33.9 33 34.1 34.2 35.4 35.2 34.7 YoY 2.1 2.5 2.2 2.5 1.4 1.5 1.3 1.7 OPEC crude 33.2 34 33.2 33 33 34.2 34.4 33.6 YoY 0.5 1.3 0.8 0 0.2 1 0.4 0.4 Source: Credit Suisse Global Energy Team estimates Figure 14: CS oil price forecast and scenarios Figure 15: OPEC taking share (trended SA, mb/d)

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Global Energy Team Source: IEA, JODI, EIA, Petrologistics, BP, country data, Credit Suisse Global Energy Team estimates Upside risk to CS’s 2017 oil price forecast, should OPEC stick to its act In November 2016, OPEC agreed to the outline of a deal that would cut production to 32.5mb/d from a record-high output in excess of 34mb/d in October. In addition, an unprecedented 11 non-OPEC countries also pledged a collective 558kb/d cut in their production. In effect, CS' Global Energy Team thinks this involves a cut of 1mb/d to 33.0mb/d, which we project as the average OPEC production in 1H17. We have also fine- tuned our global forecasts to reflect lower oil production from Russia and Oman. CS base case: 33.0mb/d of 2017 OPEC-14 crude production With our modelling of an OPEC cut to 33.0mb/d in 1H17, we maintain our forecast for an average US$56/bbl Brent oil price forecast for 2017, some 25% higher than the ~US$44/bbl of 2016 and 15% higher than the US$52/bbl of 2015. Our base case factors in a partial implementation of the OPEC cut deal with 33.0mb/d of the 2017 OPEC-14 crude production.

China Oil & Gas Sector 8 12 January 2017

Oil prices could trade towards the bull-case scenario if OPEC sticks to the low end of the target cut Nonetheless, given OPEC's newfound sense of purpose, we note that there is an upside risk to our price forecast. In the case of OPEC members adhering to the 32.5mb/d low-end range of the output target throughout the first half of 2017, we expect already drawing global inventories to fall faster and prices to inflect higher. This, in our view, will stimulate oil prices to trade towards our bull-case scenario, where we expect both Brent and WTI to break US$70/bbl by the second half of the year (as illustrated in Figure 16). This is notably higher than the US$60/bbl for 2H17 in our base case. This scenario denotes stock draw of ~1.5mb/d (vs 0.2mb/d in the base case) in 2017. Based on CS’s core price scenario, US oil production flat-lines into year-end 2016 and begins to grow all over again from 2Q17 forward, and significantly faster in 2018 and perhaps in 2019.

Figure 16: Credit Suisse oil price forecasts—base case and bull case (US$/bbl) 2014 2015 2016 1Q17E 2Q17E 3Q17E 4Q17E 2017E 2018E 2019E LT Base Case Brent 98.9 52.4 44.0 46.0 56.0 61.0 62.0 56.3 65.0 65.0 65.0 WTI 93.1 48.8 43.2 45.0 55.0 60.0 60.0 55.0 62.5 62.5 62.5 Bull Case Brent 98.9 52.4 44.0 61.0 66.0 71.0 72.0 67.5 65.0 65.0 65.0 WTI 93.1 48.8 43.2 60.0 65.0 70.0 70.0 66.3 62.5 62.5 62.5 Source: Credit Suisse Global Energy Team estimates Inventory drawdown should begin this year Our earlier expectations that an inventory surplus contraction would commence in 2H16 failed to materialise, but days cover should end the year marginally below the end-2015 mark. An important subject of this matter is China. We flag that most of the inventory building in China in the past few years should not be considered an inventory surplus, given that this "surplus" turns into a deficit when excluding its SBR. Another common source of excess inventory surplus lies in the US, which has greater production variability justified by its role as one of the largest refiners in the world. Most of the actual surplus is found in independent storage and Mideast, particularly Saudi, inventories. Interestingly, these stocks have come down in 9M16. We expect to see inventories draw to normalise demand cover by end-2017 (see Figure 18).

Figure 17: CS global inventory accounting; surplus in independent storage and Mideast declined in 4Q16 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Reported Commercial Oil Inventories + China SPR 5,866 5,906 5,932 5,956 6,030 6,022 6,096 6,075 6,057 China SPR 231 257 280 305 324 323 338 350 367 Reported Commercial Oil Inventories 5,635 5,648 5,653 5,651 5,706 5,699 5,757 5,725 5,690 crude 3,092 3,089 3,107 3,098 3,125 3,127 3,109 3,096 3,092 products 2,543 2,559 2,546 2,552 2,581 2,572 2,649 2,629 2,598 Independent Storage 202 213 206 202 210 204 211 196 198 Middle East 514 513 507 504 501 497 494 493 490 Source: Credit Suisse Global Energy Team

China Oil & Gas Sector 9 12 January 2017

Figure 18: Global inventory levels and forecasts Figure 19: China inventory surplus without SPR

Source: IEA, EIA, JODI, Country data, Credit Suisse Global Energy Team estimates Source: JODI, Country data, Credit Suisse Global Energy Team

Figure 20: Global oil inventory stock change (mbs) Figure 21: US weekly crude oil inventory (mbs)

Source IEA, JODI, EIA, Petrologistics, BP, Country data, Wood Mackenzie, Credit Suisse Source: EIA, Credit Suisse Global Energy Team Global Energy Team estimates Rebalancing makes headway as supply to drop below demand Retrospectively, the global supply surplus has significantly shrunk in the past year as supply dipped below demand for part of the time in the 2H. This year, we believe that global oil demand would largely be determined by the supply growth of OPEC under Opexit and the degree to which American shale outpaces the recently established decline trend of Nopexus. On the other hand, US production should grow in early 2017 as all recent signs point to an emerging renaissance of US shale. Elsewhere, Russia Kazakhstan (~+80kb/d YoY in 2017), Brazil (~+50kb/d YoY) and Canada are likely to be the last remaining supply growth provinces this year. Beyond these countries, production is demonstrably rolling and we expect this longer cycle production to continue its decline sharply in 2017 and 2018. The steepest declines in 2017 Nopexus come from China and Mexico, where we forecast ~430 kb/d and 160kb/d declines, respectively. Overall, we expect supply growth to be marginal at least in the first half given the Vienna deal, and potentially resurface slightly in the second half, factoring possible scale-down or discontinuation of the OPEC cut deal and higher-than-expected production in the US. Nonetheless, CS calculations suggest minimal supply growth in year-average terms in 2017.

China Oil & Gas Sector 10 12 January 2017

Figure 22: Oil supply and demand (3 mma, mb/d) Figure 23: US shale crude oil should now recover

Source: IEA, JODI, EIA, Petrologistics, BP, country data, Credit Suisse Global Energy Team Source: Credit Suisse Global Energy Team estimates estimates Figure 24: OPEC 14 crude production forecast Figure 25: China crude oil production (mb/d)

Source: IEA, JODI, EIA, Petrologistics, BP, country data, : Credit Suisse Global Energy Team Source: IEA, BP, NBS, Credit Suisse Global Energy Team research estimates estimates Solid demand extends into 2017; uncertainties remain on macro volatility With the OPEC deal locking down supply risks, demand becomes the most uncertain component of the oil price equation. In the past three years, the market theory that an oil price collapse would generate a fall in demand proved a fallacy as global demand soared above the trend pace amid falling oil prices, increased EM consumers, the making of a cyclical upturn in the US and a shallow recovery in Europe. In 2017, we expect global growth of 1.5% YoY, which would outperform trend growth of around 1.3% YoY. We estimate that the OECD will grow 0.9% YoY and EM demand growth will decelerate to 2.1% YoY. We flag three macro-environmental factors, crucial for shaping near-term oil demand. (1) The latest strength of the greenback supported by rising interest rates and inflationary promises would theoretically erode upstream costs and hence undermine the upside to oil. (2) Accommodating easing and fiscal policies globally present upside to oil. (3) China demands more. Notably, China's renewed increase in infrastructure spending and an export boost due to Rmb weakness appear to be favourable to growth in 2017. We model around 3.5% YoY demand growth in the country in 2017. In our model, we expect demand growth to decelerate slightly from ~1.6% in 2016 to ~1.5% in 2017. There are a few downside risks to our estimates, namely: (1) quicker- than-expected demand growth deceleration owing to economic volatilities; (2) a short- lived Trump "honeymoon"; (3) faltering consumer confidence; (4) European elections and potentially ensuing disordered policy responses; and (5) further deflation of global trade.

China Oil & Gas Sector 11 12 January 2017

Figure 27: Manufacturing PMI new orders suggest Figure 26: Global oil demand grows (SA 3mma LN) an upturn in GDP

Source: IEA, JODI, country data, Credit Suisse Global Energy Team estimates Source: Credit Suisse Global Energy Team estimates Figure 28: EM Asia ex-China (SA 3mma LN Scale) Figure 29: China total product demand grows (kbd)

Source: JODI, country data, Credit Suisse Global Energy Team estimates Source: Country data, Credit Suisse Global Energy Team estimates

China Oil & Gas Sector 12 12 January 2017

Downstream: Positive outlook for 2016 Refining In 2H16, refiners documented record-high margins as downstream players stood out as the biggest beneficiaries of low crude prices. Looking into 2017, we expect refining margins to be broadly stable in both China and Asia despite the anticipated crude price recovery. This is on the back of: (1) the continuance of China's refining market as a standalone market; (2) slow refinery additions; and (3) demand strength in China and APAC. Figure 30: China refining margins vs Asia refining margins

US$/bbl 25 Mechanism suspended

Jul-14 Jul-15 Jul-16

Jan-14 Jan-15 Jan-16

Mar-14 Mar-15 Mar-16

Sep-14 Nov-14 Sep-15 Nov-15 Sep-16 Nov-16

May-14 May-15 May-16

China GRM CS Singapore 6-2-3-1 margin

Source: CEIC, Reuters, Credit Suisse research

(1) China as a standalone market. In the past few years, China has proved itself as a standalone market, largely immune to external market volatilities. This was made possible by NDRC's price mechanism established in March 2013, which adjusts domestic retail prices of refined oil products when crude prices translate into a change of more than Rmb50 (~US$7.2) per tonne for gasoline and diesel over a period of ten working days. The mechanism buffers the negative effects of price swings and, in turn, guarantees stable refining margins. We expect the mechanism to shield China from the expected margin squeeze when the crude price continues its rally this year.

Figure 31: China refinery net additions in 2017-18 Country Company Refinery Capacity (kbd) Year Quarter China CNOOC Huizhou 200 2017 1Q China CNOOC Taizhou 15 2017 1Q China CNPC/SA Anning 195 2017 2H China Local Zhuhai Huafeng Shandong 100 2017 4Q China PetroChina Huabei 100 2017 3Q China Local Teapot refineries (141) 2017 4Q 2017 total 469 China CNPC/SA Yunnan 65 2018 1H China Zhejiang Rongsheng Zhejiang 400 2018 1Q China Local Teapot refineries (115) 2018 4Q 2018 total 350 Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 13 12 January 2017

(2) Slow refinery additions. Our plant-by-plant analysis forecasts a 469kdb incremental capacity in China in 2017, reflecting a 3.3% YoY increase, higher than the 0.2% YoY addition in 2016. We expect our current list of capacity addition (see Figure 31) to be quite realistic, given that supply-side reform is a key focus under the 13th Five-Year Plan. Under the plan, the NDRC will not approve new refinery and petrochemical projects in 2016-18. Further, there will be only four greenfield projects in 2016-20, compared with 4-5 per year over the past 15 years. Beyond China, we expect a 497kdb refining capacity increase across APAC, a slight increase compared to the increase logged in 2016 but much less than the mid-single-digit growth in 2012-13. Of note, Chinese teapot refineries are expected to log a net capacity decrease in 2017. Relevantly, Reuters recently reported that Beijing scrapped the export quotas held by 11 firms, which amounted to 1.5 mn t of fuel exports (3% of total export), starting this year. While we do not expect the policy to have any material impact on total China production and exports, the increasingly unfavourable regulatory landscape is likely to disincentive teapot refiners from investing in significant capacity increase in the near term.

Figure 32: China oil demand remains strong

(kb/d) 2016 11,000 2015 10,500 2014 10,000 9,500 5 year avg. 9,000 8,500 Shaded area indicates historical 5-year range 8,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: CEIC, Reuters, Credit Suisse research

(3) Continued strong demand in China and Asia. China oil demand has grown 1.03% YoY to October last year despite weakened consumption, the glut of fuel and the industrial slowdown across Asia. In particular, gasoline demand in China grew 3% YoY during that period, driven by skyrocketed demand of passenger car sales in the country. We see continued strength of gasoline and diesel in China amid further decoupling of the nation's crude oil use from its industrial economy and further acceleration of the growth in oil- consuming products dominated by passenger cars. Notably, this duration of the uptrend of the domestic conventional car industry was further lengthened as the investigation of China's electric car in early 2016 is likely to curb the expansion of electric cars in China.

Figure 33: China automobile production growth 40% 35% 30% 25% 20% 15% 10%

5% YoY change (%) change YoY 0% -5% Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 -10% -15%

Source: CEIC, Credit Suisse research

China Oil & Gas Sector 14 12 January 2017

Chemicals Ethylene Weakness for the ethylene chain delayed into 2018. In our 2016 outlook, we predicted a weak year for the ethylene chain in 2016 due to the mass of planned world-class capacity additions. We note, however, that the completion schedule for most of this planned capacity expansion was postponed to 2017-18 (2017 capacity addition: 9.3 Gt, 2018: 6.6 Gt, 2019: 6.6 Gt) due to increased construction costs, a shift in coal policy that limited CTO plants in China and less investment under the low-oil environment. As a result, ethylene logged another great year as margins further climbed from US$603/mt in 2015 to historical-high US$654/mt in 2016. The Asian ethylene market started to strengthen in 4Q16, notwithstanding an uptick in oil prices; hence, we expect ethylene margins to be sustained at US$650/mt levels through 2017.

Figure 34: Global ethylene capacity growth Figure 35: Global ethylene outlook

(US$/mt) 200 94% 6% 700 180 92% 4% 600 160 90% 140 2% 500 120 88% 0% 400 100 86% -2% 300 80 84% 60 -4% 200 82% 40 -6% 100 20 80%

-8% - - 78%

2004 2009 2000 2001 2002 2003 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2020E 2016E 2017E 2018E 2019E

2016E 2017E 2018E 2019E 2020E Demand - Capacity growth (LHS) Ethylene spread (RHS) Capacity (LHS) Consumption (LHS) Utilisation rate (RHS)

Source: FGE, industry data, Credit Suisse estimates Source: FGE, industry data, Credit Suisse estimates

Figure 36: Ethylene-naphtha spread Figure 37: Cracker margin

US$MT Shaded area indicates historical 5-year range US$MT Shaded area indicates historical 5-year range 1,000 500

800 400 600 300 400

200 200

- 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Max Min Avg Max Min Avg 2014 2015 2016 2014 2015 2016

Source: the BLOOMBERG PROFESSIONAL™ service, Datastream, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Datastream, Credit Suisse research

China Oil & Gas Sector 15 12 January 2017

Figure 38: Major ethylene capacity additions delayed by 3-6 months Jun-16 start-up Jan-17 start-up Ethylene capacity schedule estimate schedule estimate increase (ktpa) United States Westlake Petrochemical 2Q17 2Q17 135 Chevron Phillips 2Q17 1Q18 1,500 ExxonMobil Chemical (Baytown) 2Q17 1Q18 1,500 Dow Chemical 2Q17 4Q17 1,500 Formosa Plastics 4Q18 4Q18 1,150 Occidental/Mexichem 3Q17 2Q17 550 Ingleside Ethylene 1Q17 2Q17 545 South Korea Korea Petrochemical Ind. 3Q17 3Q17 330 LG Chem - 4Q18 230 Lotte Chemical - 3Q18 200 Malaysia Lotte Chemical Titan 3Q17 4Q17 45 India ONGC Petro-additions (OPaL) 1Q17 1Q17 550 Reliance Industries 1Q17 3Q17 1,460 Source: FGE, industry data, Credit Suisse estimates

Figure 39: Capacity increase rolled over into 2018

7000

6000

5000

4000

3000

2000

Estunated major capacity additions (ktpa) additions capacity major Estunated 1000

0 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18

Jun-16 estimate Jan-17 estimate

Source: FGE, industry data, Credit Suisse estimates

China Oil & Gas Sector 16 12 January 2017

Selecting chemicals amid a more challenging environment While the overall chemical outlook has become more challenging with the anticipated increase in feedstock prices, a few derivatives stand out with a higher likelihood of recording a better 2017 performance as they have bottomed out in their historical margin range and are likely to push up utilisation in 2017. Among these products, we highlight propylene and PP, ACN, MEG and butadiene, which we believe imply limited downside and significant upside in 2017-18. Beyond this list, we also believe that despite PVC nearing the peak of its historical margin range, current favourable market conditions (strengthening demand and tight supply) denote further upside for the product in 2017.

Figure 40: Exploring chemicals' positioning in their cycles Close to peak of historical margin range Close to trough of historical margin range 6,000 400 5,000 200 4,000 - 3,000 (200) 2,000 (400) 1,000 (600)

- (800)

PS PP PX

PET CPL PTA

BPA ABS

PVC SBR

EDC

VCM

MEG

ACN

LDPE

Acetic

HDPE

Phenol

LLDPE

Styrene

Benzene

Ethylene

Propylene Butadiene 07-16 Peak 07-16 Trough Current (Dec-16) Estimated BP change in capacity utilization rate in 2017 (RHS)

Source: Datastream, Credit Suisse research Propylene chain Propylene and PP: 2016 has been an uncharacteristically weak year for the propylene chain due to the supply glut in the wake of concerted capacity additions. We expect the supply of propylene and its main derivative polypropylene (PP) to start tightening and balance out starting in 2H17. Our updated global supply-demand model suggests that propylene supply growth should start slowing to 3.3 mn MT/year in 2017 (2016: +4.8% YoY, 2017: +2.8% YoY) against demand growth of 4.2 mn MT/year. As a result, we expect the propylene utilisation rate to recover from 81% in 2016 to 82% in 2017 and to 83%+ from 2018 onwards. The encouraging outlook of propylene and stronger demand for PP from industrial users, especially in China, could support PP margins.

Figure 41: Propylene-Naphtha historical spreads Figure 42: PP-Propylene historical spreads

US$MT Shaded area indicates historical 5-year range US$MT Shaded area indicates historical 5-year range 700 700 600 600 500 500 400 400 300 300 200 100 200 - 100 (100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Max Min Avg Max Min Avg 2014 2015 2016 2014 2015 2016

Source: the BLOOMBERG PROFESSIONAL™ service, Datastream, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Datastream, Credit Suisse research

China Oil & Gas Sector 17 12 January 2017

Acrylonitrile (ACN): ACN saw an extraordinary margin recovery in 2H16 as its spread shifted from the trough of -US$3/mt in 1H16 to its historical seasonal peak of US$134/mt in 2H16. We expect margins to continue rising in 2017 as the Asian market remains tight and the market is only expecting a total of 0.3 mn MT capacity addition in 2017-20 versus 0.5 mn MT anticipated demand growth during the same period. ACN is the feedstock of Acrylonitrile-Butadiene-Styrene (ABS), one of the most widely used and versatile plastic. ABS margins are currently under pressure due to overcapacity but its demand is expected to see continued growth owing to its wider applications in automotive, building and construction, and consumer goods and electronics industries. Thus, we also expect firm demand growth for ACN in 2017-20. Based on our global supply-demand model, we expect a modest uptick in ACN utilisation in 2017 to 88.6% and 91%+ in 2018 onwards.

Figure 43: ACN-propylene-ammonia spreads Figure 44: ACN supply to tighten in 2017

US$MT Shaded area indicates historical 5-year range (ktons) 250 200 8 100% 7 95% 150 6 5 90% 100 4 85% 50 3 80% 2 - 1 75% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - 70%

(50)

2005 2015 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014

2016E 2017E 2018E 2019E 2020E Max Min Avg 2014 2015 2016 ACN capacity (LHS) Utilisation rate (RHS)

Source: the BLOOMBERG PROFESSIONAL™ service, Datastream, Credit Suisse research Source: FGE, industry data, Credit Suisse estimates MEG We reiterate our selection of monoethylene glycol (MEG) as one of the best products from 2017 onwards, given that: (1) capacity growth in 2017-18 stands at only ~1.2 mn MT/year vs trend demand growth of 1.1 mn MT/year and (2) low inventory in China (below 600k tonnes vs peak of 1.2 MT/year during 2013-2014) and (3) PET polyester fibre capacity rates above 70% from 2018 onwards. We highlight that MEG is an important raw material of PET, antifreeze and solvents, all of which are seeing strong demand growth. However, the volatile pricing of raw materials involved in the MEG are preventing companies from entering the industry. This cements our thesis that there are very limited near-term downside risks for MEG while there is substantial growth potential supported by downstream demand. Figure 45: MEG-ethylene spread Figure 46: MEG operating rate to increase in 2017

95% 800 US$MT Shaded area indicates historical 5-year range 600 700 500 90% 600 400 300 85% 500 200 400 100 80% - 300 (100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 200 75% (200) 100

70% - Max Min Avg 2003 2005 2007 2009 2011 2013 2015 2017E 2014 2015 2016 Operating rate MEG-Naphtha (US$/MT)

Source: the BLOOMBERG PROFESSIONAL™ service, Datastream, Credit Suisse research Source: FGE, industry data, Credit Suisse estimates

China Oil & Gas Sector 18 12 January 2017

Butadiene We expect butadiene to improve materially in 2017, as downstream demand (especially for synthetic rubber) recovers and supply tightens. In 2016, the supply of propylene and butadiene has tightened as a side-effect of heavy ECC capacity expansion, which paves the way for a full-fledged recovery for BD in 2017. Further, we expect overcapacity of main BD products—SBR and PBR—to ease in 2017 as demand catches up. Particularly, as China experiences stronger new car sales in the wake of cuts in vehicle taxes, higher demand for tyre-use rubber is expected to push up demand for synthetic rubber (i.e., SBR/PBR) when new tyre plants come on line. Our updated global supply-demand for BD modelled for 0.4 mn MT/year supply growth in 2017/18, vs demand growth of 0.5 mn MT/year. We expect utilisation to improve marginally from 79% to 81% in 2017/18 and rise to 83%+ in 2018 onwards. Figure 48: China tyre (Michelin) demand growth Figure 47: Butadiene utilisation to increase in 2017 trend suggests solid outlook for BD and SBR

US$MT US$/MT 50% 1,000 2,500

800 40% 2,000

600 30% 1,500

400 20% 1,000

200 10% 500 - 2003 2005 2007 2009 2011 2013 2015 2017E 0% Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 - -200 -10%

-400 -500 demand Tire Truck and Light Car Passenger inchange % YoY -20% America Europe Africa Middle east Asia Butadiene-Naphtha (RHS) Original equipment tires Replacement Tires

Source: FGE, industry data, Credit Suisse estimates Source: Michelin, Credit Suisse estimates PVC While PVC is topping its historical margin range, and thus defeating one of our rules of thumb of spotting upcoming chemical outperformers, we believe the outlook for PVC would continue to be positive this year amid steadily increasing demand and tight supply. PVC is the third-largest commodity thermoplastic produced in the world after PE and PP. In 2017, the chemical is likely to benefit from infrastructure projects in Europe pushed back to 2017, coupled with tight supply conditions bolstered by the limited supply in China due to increased regulations on the carbide production process (introduced in 2017). Our global supply-demand modelled for capacity to grow at 2.8% YoY in 2017 and consumption to grow at 3.5% YoY. The utilisation rate is expected to improve slightly to 70% in 2017 from 69% and to over 73% in 2019+. Figure 49: Utilisation to continue improving in 2017 Figure 50: PVC peaked its historical margin range in FY16

(ktons) US$MT Shaded area indicates historical 5-year range 70 90% 600 60 85% 500 50 80% 400 40 75% 300 30 70% 20 200 10 65% 100 - 60% -

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2004 2012 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015

2019E 2017E 2018E 2020E 2016E Max Min Avg PVC capacity (LHS) Utilisation rate (RHS) 2014 2015 2016

Source: FGE, industry data, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Datastream, Credit Suisse

China Oil & Gas Sector 19 12 January 2017

Multiple catalysts ahead (1) CNOOC’s Strategy Preview CNOOC will be hosting its annual Strategy Preview on 19 January 2017. Over the past year, the market has been concerned about CNOOC’s deteriorating production and low reserve life, and expectations are low heading into the Preview, but we believe it should surprise the market on the upside. First, on production, we believe that CNOOC should announce a 3-5% YoY decline in 2017 volume target which is more resilient than previous projections. The market is predicting a 5-8% YoY decline in 2017 volumes, so the guidance should be a positive surprise to the market, in our opinion. Second, two recent mega-size discoveries should address concerns on low reserve life. ExxonMobil has announced/confirmed two significant discoveries in late 2016, but given CNOOC is not the operator, the company has not made a public announcement and might have missed by the market. Based on our initial assessment, these two discoveries alone could bring c.250mmboe of reserve adds to CNOOC and raise its oil reserve life to nine years (from seven currently).

■ Liza discovery: The Liza discovery is located in offshore Guyana with a potential recoverable resource of 1.4 bn barrels. ExxonMobil is the operator with a 45% interest in the block and CNOOC owns 25% interest. On 20 December 2016, ExxonMobil has announced that it has submitted an application for a production licence and initial development plan early December and will look to fast-track the development. ExxonMobil confirmed the discovery through the Liza-2 exploration well, which has encountered more than 58 meters of oil-bearing sandstone reservoirs in Upper Cretaceous formations. The well was drilled to 5,475m in 1,692m of water. The second well has confirmed the presence of high-quality oil from the high-porosity sandstone reservoirs seen in the Liza-1 well.

■ Owowo discovery: The Owowo discovery is located in offshore Nigeria with a potential recoverable resource of 1bn barrels. ExxonMobil announced the discovery on 27 October 2016. ExxonMobil is the operator with a 27% interest in the block and CNOOC owns an 18% interest. The Owowo-3 exploration well encountered about 140 meters of oil-bearing sandstone reservoir. Owowo-3 extends the resource discovered by the Owowo-2 well, which encountered about 157m of oil-bearing sandstone reservoir.

(2) Sinopec’s marketing divestment: Paving the way for non-fuel business expansion Reuters reported on 4 January that Sinopec has appointed investment banks for a potential listing that could raise as much as US$12 bn. Back in 2014, Sinopec had sold down a 30% stake in its marketing division, raising Rmb107 bn (US$17.5 bn) through a capital injection agreement with 25 investors, with plans to make further divestment. In this section we reiterate the potential upside of Sinopec’s non-fuel retail business, both in terms of earnings and valuation upside. Sinopec's marketing unit encompasses several businesses, including its 25,000 Easy Joy convenience stores out of its 30,560 service station network, its B2C online shopping mall (www.ejoy365.com; launched in 2011) and restaurant collaborations with McDonald's and KFC (launched in 2009). A further divestment of the marketing unit would raise funds that Sinopec could invest in more non-fuel businesses, such as vehicle maintenance and advertising, which would allow Sinopec to better utilise the business potential of its existing distribution network in China.

China Oil & Gas Sector 20 12 January 2017

Figure 51: Sinopec's major non-fuel strategic cooperation in recent years Date Partner Terms Jun-2006 McDonald's Agreement to set up its Drive-Thru restaurants at selected Sinopec service station sites across China Nov-2011 Yum! Brands Agreement to open drive-through outlets at Sinopec's gas stations and expressway service stations May-2014 China Taiping Insurance Group Sinopec Sales will leverage its network and carry out car insurance and life insurance business of China Taiping in selected stations under Sinopec's traditional service network such as convenience stores and car service. Meanwhile, both parties will share customer resources and cross market. Jul-2014 Ruentex Group (Taiwan retailer) Agreement to develop non-oil businesses, including convenience stores, e-commerce and financial services Aug-2014 Tibet Highland Natural Water Ltd Agreement to establish a glacier water brand and use Sinopec's retailing network to sell it nationwide Aug-2014 S.F. Express Sinopec EasyJoy will connect its nationwide retail stores with S.F. Express’ logistics network to achieve greater synergy. Aug-2014 yhd.com The parties will start and explore the prospects of cooperation in areas such as joint procurement, O2O (online-to-offline) business, cooperation in e-commerce platforms, oil product sales, etc. Aug-2014 Tencent, Inc EasyJoy will cooperate with Tencent to explore business development, mobile payment, brand promotion, online to offline, map navigation, customer loyalty management, big data application and cross marketing opportunities. Sep-2014 Haier Electronics Group, Sinopec would cooperate with Haier in interactive marketing and logistics. In return, Sinopec would provide Haier with fuel for transportation and delivery operations. Dec-2014 Beijing Aiyihang Auto Services Ltd Jointly operate automotive services business at the gas stations within the Sinopec Hubei network. Jul-2015 Beiqi Foton Motor Co. Partnership on information and market interaction and jointly develop electric vehicle charging stations May-2016 Zhongbai Holdings Group Co Ltd The supermarket will set up outlets in Sinopec’s charging stations Source: Company data, Credit Suisse research

Massive potential ahead We stress that Sinopec is far from reaching its growth potential, as its non-fuel business currently contributes 7% to gas station revenue (see Figure 52), far beneath the 24% logged by an average gas station embedded with a convenience store in the US. Further, we highlight the defensive nature of this unit as its integrated business model that combines fuel and non-fuel businesses forms a natural shield from disruptive forces of internet shopping platforms and buffer against the cyclical fluctuations of oil prices. Meanwhile, Sinopec also has the advantaged option to collaborate with internet companies to provide support and gain scale advantage in procurement, which could be a win-win strategy for both sides. For example, Sinopec marketing earlier entered into a strategic cooperation with online supermarket Yhd to jointly purchase certain items. The agreement allows Sinopec to use Yhd's global supply chain to cut costs and Yhd to utilise Sinopec's filling stations as pick-up locations for customers. Figure 52: Revenue breakdown of Sinopec's Figure 53: Average US gas station with convenience marketing division (2015) store revenue breakdown (2016)

Other 5% Fuel Fuel Other Other non-fuel 93% Other 76% 7% 24% 11% Convenience Groceries 13% store 2%

Source: Company data, Credit Suisse research Source: IBISWorld Significant upside for EBIT Potential upside for Sinopec EBIT can come from the following: 1. Higher convenience store penetration: At end-2015, 82% of Sinopec's service stations had convenience stores and we estimate this proportion will increase to over 95%.

China Oil & Gas Sector 21 12 January 2017

2. More single-store sales: Sinopec has seen sharp improvements in efficiency in its Easy Joy convenience stores in the past few years as evidenced by the improvement from its single-store sales of Rmb0.5 mn/year in 2012 to Rmb1.0 mn/year in 2015. We highlight that this figure is considerably higher than the number logged by the uSmile stores of its domestic rival Petrochina (2015: Rmb0.62 mn/year). Further, in our earlier report, our findings indicated that US counterparts generate on average US$1.3 mn per store (vs Sinopec: US$0.15 mn). We believe that Sinopec's rapid improvement is a good indicator that it has the potential to reach at least 50% of US peers' average. 3. Higher margins from the non-fuel business: Sinopec's marketing division registered a 3% EBIT margin in 2015, largely due to thin margins on refined petroleum products. However, the non-fuel business can easily generate 20-30% margins.

Figure 54: Sinopec's convenience store network Figure 55: Sinopec's stores are generating more growth well ahead of Petrochina's sales than Petrochina's

30,000 1.2 90% 80% 23,300 23,730 25,000 25,000 1.0 70% 20,891 0.8 60% 20,000 17,000 50% 15,000 13,000 14,000 0.6 15,000 40%

0.4 30% Penetration 10,000 20% 0.2 10%

5,000 mn) (RMB store convenience Salesper Number of convenience stores stores convenience of Number - 0% - 2012 2013 2014 2015 stations) service no of convenience stores/ of (no 2012 2013 2014 2015 Sinopec sales/store (LHS) Petrochina sales/store (LHS) Sinopec Petrochina Sinopec convenience store penetration (RHS) Petrochina convenience store penetration (RHS)

Source: Company data, China Chain Store and Franchise Association Source: Company data, China Chain Store and Franchise Association Figure 56: Thin margins on refined petroleum products weigh on overall EBIT margin Figure 57: Service station market—by number (2015)

86%

84% Petrochina 21% 82%

80% Others 47%

78%

76% Products purchase costs as a a as revenue % of costs Products purchase Sinopec 32% 74% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Company data, Credit Suisse estimates Source: CCIEE Recent marketing divestment trend of oil companies Case studies Looking beyond China, BP in Australia and PTT are also currently seeking to expand their retail business. Our Australian oil & gas analyst, Mark Samter, and Thai energy analyst, Poom Suvarnatemee, priced the BP bid for Woolworths' retail station network in Australia and the potential listing of Thailand's PTT Retail division at 14x and 8x EV/EBITDA, respectively.

China Oil & Gas Sector 22 12 January 2017

Woolworths In Australia, BP recently acquired embattled supermarket chain Woolworths. Unlike Sinopec, Woolworths's specialty lies in grocery retailing as the retail giant only forayed into the petrol business in 1996. In 2016, Woolworths operated 527 petrol stations with convenience stores, accounting for 21% share of the Australian fuel market. Prior to 2014, Woolworths jointly operated 131 additional sites with Caltex. However, in 2015, under changes to the Woolworths-Caltex alliance, 131 Caltex-operated sites were no longer recognised. In an effort to entice customers to spend money at their non-fuel stores, Woolworths stations offer a per-litre discount off pump prices for customers who spend a qualifying amount at its own-branded convenience stores or supermarkets, hence generating synergy between Woolworths’s businesses. Woolworths also provides a loyalty programme that extends across all of its chain businesses, including supermarkets and hotels. In a recent note, our Australian analyst, Mark Samter, noted that Woolworths is the winner in the acquisition. BP paid A$1.785 bn upfront and would fund 2cpl of the redemption going forward. Pre-synergies, but post Woolworths funding 2cpl of the redemption (but not the 2cpl redemption BP will now have to fund at some of its sites), this is for A$153 mn of EBIT. Adjusting for A$300-400 mn of lease liabilities and they are paying >14x EV/EBIT. Mark thinks that while BP would definitely claw some back with the supply agreement, even at 2cpl (and remember they will use a lot of third-party infrastructure) it is ~10x EV/EBIT. We estimate that the deal is valued at approximately 22x P/E.

Figure 58: Woolworths' petrol revenue breakdown Figure 59: Stable per-store sales throughout the years

100% 90 90% 80% 70% 60% 80 86% 86% 85% 85% 85% 86% 88% 50% 40%

30% store store mn) sales(A$

20% - 70 Per 10% 14% 14% 15% 15% 15% 14% 12% 0% 2010 2011 2012 2013 2014 2015 2016 60 Fuel Non-fuel 2010 2011 2012 2013 2014 2015 2016

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 60: Transaction valuation estimates Revenue (Australia Food and Petrol segment) (A$ mn) 39,410 - Fuel 4,612 - Non-fuel 34,798 EBITDA–Fuel (A$ mn) 225 EBIT–Fuel (A$ mn) 151 Net profit–Fuel (A$ mn) 84 Implied P/E (x) 22x Implied EV/EBITDA (x) 8x Source: Company data, Credit Suisse estimates

PTT Retail Marketing Plc In Thailand, PTT Public Company Limited plans to spin off its marketing arm, PTTOR (PTT Oil and Retail Business Company Ltd in 4Q17 or 2018. PTT plans to own only 45- 50% of PTTOR after the sell-down from 100% currently. PTTOR will be PTT's flagship company in the oil and retail business.

China Oil & Gas Sector 23 12 January 2017

PTT Retail Marketing distributes refined fuels through PTT network of over 1,180 service stations nationwide (excluding PTT service stations run by PTT Retail Management; around 5% of Thailand's market). Like Sinopec, PTT has modernised its service stations in recent years by increasing the number of related services offered at its stations, such as retail convenience stores. Further, PTT has entered into franchise partnerships with restaurant chains to bring fast food restaurants (Texas Chicken), café and dessert chains (Café Amazon and Daddy Dough) to its service stations. Overall, business segments under PTTOR include: (1) oil business (retail, B2B commercial, supply sales); (2) non-oil business (retail, coffee stores, rental business, and master franchise brands); (3) international business (overseas gas stations and export volume); and (4) the lubricants business. In a recent report, our Thai analyst Poom Suvarnatemee assumed a valuation of 8.2x EV/EBITDA and estimates the EV of PTTOR (the retail operating arm of PTT) at US$7 bn. Other Thai retail peers are trading above 10x. Poom estimates PTTOR achieved an ROA of 16%, higher than its comparables. Again, the attempt of Sinopec's Asian peers to push forward on marketing divestment underscores the new positioning of the marketing divisions as a valuation booster and crown jewel to oil companies amid the challenging oil market.

Figure 61: High penetration of non-fuel business in Figure 62: Fuel and utilities make up the majority of its service stations PTT Retail's revenue

1,600 100% 1,450 1,437 1,400 98% 1,245 1,200 96% 94% 1,000 92% 800 90% 600 88% 400 86% 200 121 84% 0 Gas stations Convenince stores Café Amazon Auto Service 82% 2011 2012 2013 2014 2015

Fuel Utilities Non-fuel Integrated in service stations Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

China Oil & Gas Sector 24 12 January 2017

Unit deserves valuation premium to peers We believe that Sinopec Marketing Co deserves higher valuation multiples than international peers/Chinese retailers with: (1) high single-digit same-station fuel volume growth in the next five years; (2) an oligopoly market structure; and (3) the only retail format in China not going to be disrupted by internet. Based on our case studies on retail arms of global peers such as BP and PTT and the company's upside potential, we reiterate that Sinopec Marketing Co deserves a valuation multiple of 18x EV/EBITDA with a premium over global peers.

Figure 63: Valuation comparison with domestic retailers Price Market cap P/E (x) EV/EBITDA (x) Ticker (local currency) (US$ mn) 2017E 2018E 2017E 2018E Sun Art Retail 6808.HK 7.6 9,360.5 25.0 23.4 8.3 7.5 Lianhua Supermarket 0980.HK 2.9 415.8 n.a. 95.4 n.a. n.a. Hualian Hypermart 600361.SS 7.4 710.1 77.9 46.3 n.a n.a Yonghui Superstores 601933.SS 5.1 6,993.7 38.7 32.7 17.3 14.5 Beijing Jingkelong 0814.HK 1.6 86.1 20.7 9.7 10.1 6.4 Haier 1169.HK 13.5 4,852.8 11.3 10.2 5.8 4.8 GOME 0493.HK 0.9 2,662.5 20.0 17.5 6.7 5.1 TCL 1070.HK 3.8 859.7 17.0 13.2 6.2 5.0 Skyworth 0751.HK 4.6 1,772.3 5.9 5.3 3.5 4.1 Ajisen China 0538.HK 3.2 454.6 15.2 14.0 4.0 3.2 Average 25.7 26.8 7.7 6.3 Source: Company data, Bloomberg, Credit Suisse estimates

Figure 64: Valuation comps of US and Australian peers Price Market cap PE (x) EV/EBITDA (x) Ticker (local currency) (US$ mn) 2017E 2018E 2017E 2018E US Convenience store retailer Alimentation Couche-Tard Inc ATD/B CT 60.7 26,178.0 16.0 15.1 10.2 9.5 Caseys General CASY 116.9 4,582.6 19.1 17.0 8.6 7.5 Sunoco LP SUN 26.8 2,564.0 16.0 15.4 9.4 8.9 Murphy USA MUSA 61.0 2,355.7 12.5 11.4 6.4 6.1 Average 15.9 14.7 8.7 8.0 Australia Caltex Australia CTX 30.6 5,807.1 19.5 13.8 7.8 7.7 Source: Company data, Bloomberg, Credit Suisse estimates

Figure 65: Sinopec marketing P/E estimates vs peers' P/E valuations

P/E (x) Sinopec Marketing 25x 22x 20x 20x 18x 16x 14x 15x

10x

05x

00x US peers 2017E average Caltex Australia 2017E BP-Woolworths transaction 2014 sell-down implied CS current assumed valuation valuation

Source: IBES, company data, Credit Suisse estimates

China Oil & Gas Sector 25 12 January 2017

(3) Sinopec’s gas pipeline transaction and read- through to PetroChina Positive read-through Sinopec’s gas pipeline transaction On 12 December 2016, Sinopec divested 50% of its stake in the Sichuan-to-East gas pipeline to China Life Insurance SDIC Communications for a consideration of Rmb22.8 bn. Operating since 2010, the Sichuan-to-East gas pipeline is the largest gas pipeline asset in Sinopec's history. Constructed with a total capex of Rmb62 bn, the pipeline has a designed capacity of 12 bcm and a total length of 1,702 km. It links natural gas produced from its Puguang & Yuanba gas fields in Sichuan to end-markets in Shanghai, Chongqing, Hubei, Jiangxi, Anhui, Zhejiang and Jiangsu. The pipeline is now at close to 100% utilisation. On a blended average basis, the citygate gas price that the pipeline is currently charging is ~Rmb2.0/m3. Sinopec's realised gas price as of 2015 on its E&P division is around Rmb1.6/m3. The implied transmission tariffs is thus around Rmb0.4-0.5/m3. The transaction values the entire pipeline asset at Rmb45.6 bn, or 3.7% of Sinopec's total assets as of 1H16. China Life will be taking up a 43.86% stake for Rmb20 bn, and SDIC Communications will pick a 6.14% stake for Rmb2.8 bn. The implied valuation of the transaction is 20x 2016E P/E. In our view, this deal should be welcomed by the market and is a positive to Sinopec's share price (improved 4% since the deal at the time of writing). The valuation is accretive and is higher than our original expectation as well as the city-gas operator peers. Moreover, the Rmb22.8 bn proceed was reflected in its FY16 results as a one-off gain. If we assume Sinopec maintains a 50% dividend payout for FY16 (FY15 payout was 56%), this would mean a 5% dividend yield, which puts it at the top in the energy sector. Structure of Sinopec's transaction Sinopec structured the transaction in a way that the prior investment/capex into the gas pipeline assets are in the form of a loan from the Sinopec listco; so when the deal closes the pipeline co will be repaying the loan to Sinopec. This loan is around Rmb11 bn and on an accounting basis, there should be an Rmb11bn of cash proceeds reflected in the FY16 balance sheet and cash flow statement. Also, Sinopec received a one-off revaluation gain from the gas pipeline sale, which should be reflected in the FY16 P&L. Based on our calculation, the one-off gain would be close to Rmb16-22.8 bn consideration less Rmb1.8 bn net book value of the pipeline asset less 25% income tax.

Figure 66: Structure of the Sichuan-to-East gas pipeline transaction

Loan to Sinopec China Life (43.86%) Sinopec (0386.HK) 22.8 bn (0386.HK) 22.8 bn SDIC Communications (6.14%) A L E 50% 50% Before 19.6bn 17.8bn 1.8bn Sichuan East Gas Pipeline A E Valuation 45.6 bn After • 20x P/E 45.6bn 45.6bn • 2.3x Total Assets

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 26 12 January 2017

Implied valuation rerating to PetroChina's pipeline business We believe that Sinopec's gas pipeline asset sale implied a rerating to PetroChina, as a read-through from Sinopec's higher-than-expected valuation suggests significant upside to PetroChina's gas pipeline assets. We conducted a sensitivity analysis to PetroChina's gas pipeline valuation. PetroChina revalued its pipeline assets at 1.4x P/B in December 2015 following the establishment of the Pipeline Co, valuing its pipeline assets at Rmb540 bn. If we mark-to-market PetroChina's pipeline assets using Sinopec's transaction multiples (20x P/E or 2.3x asset), this leads to Rmb700 mn-Rmb1.2 bn or an implied 1.8-3.2x P/B. We argue that PetroChina's gas pipelines should warrant a higher valuation vs Sinopec's, in our view, given that it has: (1) stronger growth potential as it hasn't reached full utilisation; and (2) higher margin vs Sinopec's (14% vs 8%). Another angle is that PetroChina on an ex-pipeline basis is only trading at 3.9x 2017 EV/EBITDA, and Sinopec on an ex-marketing basis is 4x 2017 EV/EBITDA (both at US$56/bbl oil price assumption). So, the valuation is not demanding at all, especially if one takes a more constructive view on oil prices in 2017. PetroChina's has lagged Sinopec and CNOOC over the course of 2016 amid concerns about its natural gas business outlook, including transmission tariff cut and further city- gate gas price cut. While we acknowledge these concerns do remain, Sinopec's transaction has essentially set a floor in terms of valuation expectations.

Figure 67: Sinopec's gas pipeline financial metrics Figure 68: PetroChina's pipeline division valuation and implied valuation

Rmb bn Valuation Valuation Implied Sinopec's gas pipeline valuation 45.6 Rmb bn HK$/sh methodology P/B (x) Total asset 19.6 CS current pipeline valuation 545 3.3 1.4x P/B 1.4 Implied asset valuation (x) 2.3 Net profit (annualised) 2.3 Based on SNP sell-down – high-end 1,220 7.5 2.3x Asset 3.2 Implied P/E valuation (x) 19.5 Based on SNP sell-down – low-end 700 4.3 20x P/E 1.8

Average 960 5.8 2.5

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 27 12 January 2017

Valuation rerating during an oil price upcycle The current oil price recovery cycle looks agonisingly similar to the 2009-11 recovery. One can argue that the last cycle is different, as the 2009-11 cycle was a demand-led recovery post the Global Financial Crisis while the current cycle is primarily due to a supply-side issue (read: US shale). However, it is still worthwhile to look at how Chinese Oils performed during that time.

Figure 69: Oil price recovery trend between current and past cycles

(Rebased to 100) 300

250 Oil price trend - 2016-17 vs 2009-11

200

150

100

50 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-16 Jul-16 Jan-17 Jul-17

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse CNOOC The below chart shows that CNOOC saw a meaningful multiple expansion during the oil price recovery phase in 2009-11. Its EV/EBITDA multiple rerated from 3x in early 2009 to 6x by mid-2011. CNOOC is the only pure E&P name among the three, so it is logical that it witnessed the best multiple expansion.

Figure 70: CNOOC's EV/EBITDA—2009-11 Figure 71: CNOOC's EV/EBITDA—2011 to date

6.5 7.5

6.0 7.0 5.5 +1STD: 5.3x 6.5 5.0 +2STD: 6.2x 6.0 4.5 Avg: 4.2x +1STD: 5.6x 4.0 5.5 Avg: 5.1x 3.5 5.0 3.0 -1STD: 3.2x -1STD: 4.6x 4.5 2.5 -2STD: 4.1x 4.0 2.0

1.5 3.5 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 2011 2012 2013 2014 2015 2016 2017

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

China Oil & Gas Sector 28 12 January 2017

PetroChina PetroChina has also witnessed a similar multiple expansion between 2009 and 2011, having EV/EBITDA multiple troughed at around 4x in early 2009 and rerated to 6.5x by 2011.

Figure 72: PetroChina EV/EBITDA—2009-11 Figure 73: PetroChina EV/EBITDA—2011 to current

7.0 9.0

8.5 6.5 +1STD: 6.0x 8.0 6.0 7.5 5.5 Avg: 5.3x 7.0 +1STD: 6.8x

5.0 6.5 Avg: 6.1x 6.0 4.5 -1STD: 4.7x 5.5 4.0 -1STD: 5.5x 5.0 3.5 4.5

3.0 4.0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 2011 2012 2013 2014 2015 2016 2017

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Sinopec Sinopec’s valuation rerating angle is not as strong as its Chinese peers', likely due to the fact that it has the lowest leverage to an oil price uptick. Between 2009 and 2011, its EV/EBITDA multiple rerated from 3.5x to a high of 5x in 2011.

Figure 74: Sinopec EV/EBITDA—2009-11 Figure 75: Sinopec EV/EBITDA—2011 to current

5.5 7.5

7.0 5.0 +1STD: 4.6x 6.5 4.5 +1STD: 6.0x 6.0 Avg: 4.2x

4.0 5.5 Avg: 5.4x -1STD: 3.8x 5.0 3.5 4.5 -1STD: 4.7x 3.0 4.0

2.5 3.5 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 2011 2012 2013 2014 2015 2016 2017

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

China Oil & Gas Sector 29 12 January 2017

Implied oil price Current share prices imply US$60/bbl long-term oil price on average for the Asia Oils. Sinopec is one of the lowest at US$55/bbl, CNOOC at US$60/bbl and PetroChina at US$62/bbl. This compares to CS's long-term oil price assumption of US$65/bbl.

Figure 76: Implied long-term oil price for the Asia Oils

(US$/bbl) 80 $70 70 $65 $60 $62 60 $55 $57 $50 50

- PTTEP Sinopec OGDC CNOOC PetroChina ONGC Oil India

Source: Credit Suisse estimates

Figure 77: NAV sensitivity on long-term oil price assumptions Oil price (US$/bbl) $55 $60 $65 $70 $75 $80 PetroChina 4.2 5.6 7.0 8.4 9.6 10.6 Sinopec 5.9 6.7 7.3 8.0 8.6 9.1 CNOOC 7.2 10.2 12.8 15.2 17.5 19.6 Source: Credit Suisse estimates

Figure 78: 2017 EV/EBITDA sensitivity to 2017 oil price assumption Oil price (US$/bbl) $40 $45 $50 $55 $60 $65 $70 $75 $80 PetroChina 7.9 7.0 6.2 5.6 5.1 4.6 4.3 4.0 3.8 Sinopec 5.8 5.1 4.6 4.1 3.8 3.5 3.3 3.1 2.9 CNOOC 6.3 5.4 4.7 4.2 3.9 3.6 3.4 3.2 3.1 Source: Credit Suisse estimates

China Oil & Gas Sector 30 12 January 2017

Pecking order: CNOOC>Sinopec>PetroChina ■ CNOOC (0883.HK, OUTPERFORM, TP HK$12.8): We upgrade CNOOC to an OUTPERFORM (from Underperform) and raise our TP to HK$12.8 (from HK$7.0). CNOOC is the highest leveraged to an oil price recovery given its lowest all-in cost (US$38/boe). At 4x 2017E EV/EBITDA, the stock is cheap relative to its own history and global E&P peers. The 2017 Strategy Preview would be a near-term catalyst. ■ Sinopec (0386.HK, OUTPERFORM, TP HK$7.3): We upgrade Sinopec to OUTPERFORM (from Neutral) and raise our TP to HK$7.3 (from HK$6.1). Its marketing business sell-down targeted for 2H17 would be a market focus throughout the year, and we expect plentiful newsflow on further non-fuel business collaborations. The prolonged chemical upcycle should benefit Sinopec the most, where US cracker capacity additions continue to face start-up delays and are pushed out to 2018/19. ■ PetroChina (0857.HK, NEUTRAL, TP HK$7.0): We raise our PetroChina TP to HK$7.0 (from HK$6.3) while retaining our NEUTRAL rating. We think the market has priced in a lot of expectations on the gas pipeline revaluation potential so further upside is limited, in our opinion. Our TP already factors in HK$5.8/sh of pipeline valuation, where we have benchmarked Sinopec’s implied valuation (20x P/E and 2.3x asset), higher than the 14x P/E implied valuation from PetroChina’s revaluation in Dec-2015

Figure 79: E&P all-in cost comparison for the Big 3 Oils: CNOOC is the most leveraged to oil price recovery

(US$/boe) 60 2017 oil price forecast (Brent): $56.3

50 $52.0 $42.8 40 $35.7

- CNOOC PetroChina Sinopec

Lifting cost DD&A Exploration expense Taxes Other costs

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 31 12 January 2017

Figure 80: Valuation comparison—US E&Ps Mkt cap Up/(dn) P/E (x) EV/EBITDA (x) P/B (x) ROE (%) Div. yld Company Ticker FX (US$ mn) Rat. Price TP vs TP 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E US E&Ps Anadarko APC USD 38,888 O 69.6 77.0 11% -527.4 47.5 9.1 7.0 3.2 3.0 -0.6% 6.3% 0.3% 0.3% Apache Corp. APA USD 24,857 N 62.9 77.0 22% 67.2 24.8 6.9 5.3 3.6 3.3 5.4% 13.2% 1.6% 1.6% Chesapeake Energy CHK USD 6,141 N 6.9 7.0 1% 16.1 6.3 7.2 4.7 -5.3 -35.2 -33% -562% 0.0% 0.0% Concho Resources CXO.N USD 19,526 O 133.7 160.0 20% -590.8 118.7 13.5 9.9 2.6 2.5 -0.4% 2.1% 0.0% 0.0% Devon Energy DVN USD 24,970 O 46.7 55.0 18% 45.6 21.4 9.1 6.8 3.9 3.3 8.5% 15.5% 0.5% 0.5% EOG Resources EOG USD 59,606 N 103.4 96.0 -7% 149.6 37.7 13.3 9.0 5.2 4.7 3.5% 12.6% 0.0% 0.0% Noble Energy NBL USD 15,894 O 37.0 46.0 24% -57.9 137.3 8.6 7.0 1.7 1.7 -2.9% 1.3% 0.0% 0.0% Occidental Petroleum OXY USD 53,068 N 69.4 67.0 -3% 110.1 57.0 9.7 7.5 2.6 2.8 2.4% 4.9% 4.3% 4.3% Pioneer Natural PXD USD 30,765 O 181.3 216.0 19% 138.9 42.9 13.2 8.9 3.1 2.9 2.2% 6.6% 0.0% 0.0% Range Resources RRC USD 8,245 O 33.4 46.0 38% 51.7 19.3 9.4 6.4 3.3 2.8 6.4% 14.7% 0.2% 0.2% Canadian Natural Res. CNQ.TO CAD 34,456 O 41.2 48.0 17% 31.8 15.4 8.3 6.3 1.8 1.7 5.6% 10.8% 2.3% 2.6% Encana Corp. ECA USD 12,444 O 12.8 14.0 9% 70.1 13.5 11.7 6.4 2.0 1.8 2.9% 13.2% 0.5% 0.5% Average -41.2 45.1 10.0 7.1 2.3 -0.4 0.0% -38% 0.8% 0.8% Note: O = OUTPERFORM, N = NEUTRAL, U= UNDERPERFORM. Priced as of 10 Jan 2017. Source: IBES, company data, Credit Suisse estimates

Figure 81: Valuation comparison—Asia refiners Mkt cap Up/(dn) P/E (x) EV/EBITDA (x) P/B (x) ROE (%) Div. yld Company Ticker FX (US$ mn) Rat. Price TP vs TP 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E APAC refiners SK Innovation 096770.KS KRW 12,360 NC 155,500 - - 7.7 7.6 4.4 4.1 0.8 0.7 10.6% 10.0% 2.8% 2.7% S-Oil Corp 010950.KS KRW 8,105 NC 84,700 - - 8.4 7.8 6.8 6.2 1.4 1.2 17.4% 16.4% 3.3% 3.7% GS Holdings 078930.KS KRW 4,143 NC 52,600 - - 6.9 6.2 5.7 5.0 0.7 0.6 9.8% 10.2% 2.9% 3.1% FPCC 6505.TW TWD 32,109 NC 108.5 - - 19.3 21.8 11.6 12.5 3.5 3.4 18.1% 15.6% 4.1% 3.6% Thai Oil TOP.BK THB 3,958 U 69.0 69.0 0% 10.0 9.4 5.8 5.5 1.3 1.2 12.6% 12.4% 4.3% 4.6% IRPC IRPC.BK THB 2,931 O 5.10 5.60 10% 10.2 8.8 7.6 6.5 1.2 1.1 11.7% 12.6% 4.7% 5.4% Reliance RELI.BO INR 51,699 N 1,087 1,035 -5% 11.1 17.1 10.1 8.7 1.2 1.1 10.8% 6.6% 1.4% 0.9% Indian Oil IOC.BO INR 24,660 O 346.4 375.0 8% 10.5 9.8 7.1 6.9 2.0 1.7 18.6% 17.7% 3.5% 3.7% Bharat Petroleum BPCL.BO INR 13,960 O 658.5 690.0 5% 12.1 10.4 7.6 6.6 2.9 2.5 23.9% 23.5% 2.9% 3.4% HPCL HPCL.BO INR 7,119 O 478.0 476.7 0% 10.5 10.1 7.1 6.9 2.3 2.0 22.3% 19.9% 2.9% 3.0% Sinopec SPC 0338.HK HKD 9,160 O 4.43 5.50 24% 9.7 10.8 9.2 10.2 1.5 1.3 15.0% 11.9% 3.4% 3.1% Average 10.6 10.9 7.5 7.2 1.7 1.5 15.5% 14.3% 3.3% 3.4% Note: O = OUTPERFORM, N = NEUTRAL, U= UNDERPERFORM, NC = NOT COVERED. Priced as of 10 Jan 2017. Source: Company data, IBES (for NC companies), Credit Suisse estimates

Figure 82: Valuation comparison—Asia petrochemicals Mkt cap Up/(dn) P/E (x) EV/EBITDA (x) P/B (x) ROE (%) Div. yld Company Ticker FX (US$ mn) Rat. Price TP vs TP 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E APAC petrochemicals LG Chem 051910.KS KRW 15,551 NC 267,500 - - 12.8 12.2 5.1 4.9 1.3 1.2 10.6% 10.2% 1.7% 1.7% Hanwha Chemical 009830.KS KRW 3,667 NC 26,200 - - 6.3 6.1 5.5 5.0 0.7 0.7 12.3% 11.1% 0.9% 0.9% Lotte Chemical 011170.KS KRW 11,174 NC 375,000 - - 7.8 8.0 4.0 4.1 1.3 1.1 17.6% 14.7% 0.7% 0.7% FPC 1301.TW TWD 17,824 NC 89.50 - - 16.2 16.5 20.8 19.7 1.8 1.8 11.5% 11.0% 4.3% 4.2% NYPC 1303.TW TWD 18,004 NC 73.10 - - 17.8 17.3 13.5 12.6 1.7 1.6 9.1% 9.3% 3.9% 3.9% FCFC 1326.TW TWD 17,587 NC 95.60 - - 14.8 15.5 9.8 9.5 1.8 1.7 11.5% 11.0% 4.7% 4.7% PTTGC PTTGC.BK THB 8,052 O 63.50 74.00 17% 11.4 9.1 7.1 6.3 1.1 1.0 9.7% 11.5% 4.8% 6.0% Indorama Ventures IVL.BK THB 5,009 N 37.00 31.00 -16% 16.9 15.3 8.4 8.0 2.3 2.1 13.5% 13.8% 3.0% 3.3% Siam Cement SCC.BK THB 16,805 O 498.00 574.00 15% 11.3 11.6 8.4 8.6 2.3 2.0 19.9% 17.6% 4.0% 3.9% Sinopec SPC 0338.HK HKD 9,160 O 4.43 5.50 24% 9.7 10.8 9.2 10.2 1.5 1.3 15.0% 11.9% 3.4% 3.1% Petronas PCGB.KL MYR 12,824 N 7.17 7.30 2% 17.3 15.4 8.5 7.6 2.0 1.9 11.8% 12.4% 2.9% 3.2% Average 12.9 12.5 9.1 8.8 1.6 1.5 13.0% 12.2% 3.1% 3.2% Note: O = OUTPERFORM, N = NEUTRAL, U= UNDERPERFORM, NC = NOT COVERED. Priced as of 10 Jan 2017. Source: Company data, IBES (for NC companies), Credit Suisse estimates

China Oil & Gas Sector 32 12 January 2017

Appendix I: Oil sub-sectors—performance over historical oil cycles In this section, we compare the current cycle against the previous major oil cycles in 1996- 97 and 2008-09. Judging from history, OFS and Refiners are the sub-sectors that were the first to recover and rebounded the most as oil prices stabilised. 1996-97 oil cycle There were not too many Asia oil companies listed back then. So, we primarily compared US companies vs the oil price over the 1996-97 cycle. Over the 1996-97 oil cycle, oil prices peaked at US$24/bbl in December 1996 and subsequently declined over the next 23 months, before hitting a bottom of US$10/bbl in November 1998. Of the sub-sectors, integrateds led the rebound versus refiners and OFS. Both OFS and refiners surged post the oil price peak, but subsequently corrected before oil prices bottomed two years later.

Figure 83: Price performance—global integrateds vs Brent Figure 84: Price performance—US refiners vs Brent

180 140

130 160 120

140 110

100 120 90

100 80

70 80 60 60 50

40 40 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Brent US Refiners Brent Global Integrateds Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Figure 85: Price performance—US OFS vs Brent

200 180

160

140

120

100

40 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Brent US OFS Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

China Oil & Gas Sector 33 12 January 2017

2008-09 oil cycle The 2008-09 oil cycle occurred against the backdrop of the Global Financial Crisis—the world economy came to a halt and so did global oil demand. Before the global financial crisis, the oil price rallied to US$147/bbl in June 2008, before retreating to a trough of US$34/bbl in December 2008. In the US, integrateds were the outperformers compared to refiners and OFS. Global integrateds' share price correction was much muted relative to oil prices. Refiners only had a strong rally for one-and-a-half years and outperformed oil prices after they bottomed, while OFS barely outperformed over the same period. In Asia, refiners led the rebound among sub-sectors as oil prices returned from the trough, having a massive outperformance. Figure 86: Price performance—global integrateds vs Brent Figure 87: Price performance—Asia integrateds vs Brent

110 180

100 160

90 140 80 120 70 100 60 80 50 60 40

30 40

20 20 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Brent Global Integrateds Brent Asia Integrateds Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

Figure 88: Price performance—US Refiners vs Brent Figure 89: Price performance—Asia Refiners vs Brent

220 300

200 250 180

160 200 140

120 150

100 100 80

60 50 40

20 - -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Brent US Refiners Brent Asia Refiners

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

Figure 90: Price performance—US OFS vs Brent Figure 91: Price performance—Asia OFS vs Brent

110 140

100 120 90

80 100

70 80 60

50 60

40 40 30

20 20 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Brent US OFS Brent Asia OFS

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

China Oil & Gas Sector 34 12 January 2017

2014-17 oil cycle The 2014-17 oil cycle was a supply-led cycle driven by the supply surge from non-OPEC, specifically US shale oil. Oil prices averaged US$100/bbl over 2010-13, reached a peak of US$115/bbl in July 2014 and have corrected sharply since, bottoming at 12-year lows of ~US$26/bbl Brent in January 2016. Into 2017, we expect closer cooperation among oil players to cut production to start rebalancing the market and support crude price recovery. Accordingly, OFS names would finally start to improve after two years of underperformance. On the other hand, we expect refiners and other downstream players to start to feel the squeeze in the next 12 months as crude oil discounts start to dissipate.

Figure 92: Price performance—global integrateds vs Brent Figure 93: Price performance—Asia integrateds vs Brent

110 120

100 110

90 100 90 80 80 70 CS forecast 70 60 CS forecast 60 50 50

40 40

30 30

120 150 140 110 130 100 120 90 110

80 100 90 70 80 CS forecast 60 70 CS forecast 50 60 50 40 40 30 30

20 20 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Brent US Refiners Brent Asia Refiners

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

Figure 96: Price performance—US OFS vs Brent Figure 97: Price performance—Asia OFS vs Brent

110 130

100 120 110 90 100 80 90

70 80 CS forecast 60 70 CS forecast 60 50 50 40 40

30 30

20 20 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Brent Asia OFS Brent US OFS Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

China Oil & Gas Sector 35

Sector Gas Oil & China Appendix II: Global oil demand-supply balance Global crude oil supply Figure 98: World crude oil supply by region and key economics (mb/d) (mb/d) 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16 3Q16 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 2018E

Global 91.9 92.8 93.1 93.7 95.2 93.7 95.6 96.5 96.6 97.1 96.5 97.0 95.5 96.2 97.7 96.6 96.0 95.6 97.2 98.2 96.8 98.7

YoY 0.6 1.6 1.2 1.6 2.8 1.8 2.8 3.4 2.9 1.9 2.7 1.4 (1.0) (0.4) 0.6 0.2 (1.1) 0.1 1.0 0.5 0.1 2.0 YoY (%) 1% 2% 1% 2% 3% 2% 3% 4% 3% 2% 3% 2% -1% 0% 1% 0% -1% 0% 1% 1% 0% 2% OECD 51.1 52.5 52.8 53.2 54.6 53.3 54.9 54.6 54.7 55.2 54.8 54.7 53.2 53.5 54.2 53.9 53.7 53.1 53.4 54.2 53.6 54.3 YoY 1.6 1.9 2.2 2.1 2.4 2.2 2.5 1.8 1.5 0.5 1.6 (0.2) (1.4) (1.2) (1.0) (0.9) (1.1) (0.1) 0.0 0.1 (0.3) 0.7 YoY (%) 3% 4% 4% 4% 5% 4% 5% 3% 3% 1% 3% 0% -3% -2% -2% -2% -2% 0% 0% 0% -1% 1% Americas 18.0 19.1 19.7 20.1 20.8 19.9 20.9 20.5 21.0 21.0 20.8 20.9 20.0 20.3 20.2 20.3 20.0 20.1 20.5 20.8 20.4 21.3 YoY 1.4 1.7 2.2 1.9 2.0 2.0 1.8 0.8 0.9 0.2 0.9 0.0 (0.6) (0.6) (0.8) (0.5) (0.9) 0.2 0.2 0.6 0.0 0.9 YoY (%) 9% 10% 13% 10% 11% 11% 10% 4% 4% 1% 5% 0% -3% -3% -4% -2% -4% 1% 1% 3% 0% 5% Europe 13.8 13.9 13.7 13.7 13.9 13.8 14.0 14.0 13.8 14.1 14.0 14.2 13.9 13.9 14.5 14.1 14.5 14.1 14.3 14.6 14.4 14.6 YoY 0.2 0.1 0.0 0.0 (0.1) 0.0 0.1 0.2 0.1 0.2 0.2 0.2 0.0 0.0 0.4 0.1 0.3 0.2 0.5 0.2 0.3 0.2 YoY (%) 2% 0% 0% 0% -1% 0% 1% 2% 1% 1% 1% 1% 0% 0% 3% 1% 2% 1% 3% 1% 2% 1% Asia Pacific 7.6 7.6 7.6 7.4 7.7 7.6 7.7 7.7 7.7 7.7 7.7 7.5 7.3 7.2 7.0 7.2 6.9 6.7 6.7 6.6 6.7 6.4 YoY 0.0 (0.1) (0.1) 0.0 0.1 0.0 0.1 0.1 0.2 0.0 0.1 (0.1) (0.4) (0.5) (0.7) (0.4) (0.6) (0.6) (0.5) (0.4) (0.5) (0.4) YoY (%) 0% -1% -1% 0% 1% 0% 1% 2% 3% 0% 1% -2% -5% -7% -9% -6% -8% -8% -7% -5% -7% -5% Non-OECD 4.6 4.7 4.7 4.9 5.1 4.8 5.1 5.0 5.1 5.1 5.1 4.8 4.9 5.0 5.1 4.9 4.9 4.9 4.8 4.9 4.9 4.8 YoY 0.0 0.2 0.2 0.3 0.4 0.3 0.4 0.3 0.2 0.0 0.2 (0.3) (0.2) (0.1) 0.0 (0.1) 0.1 0.0 -0.2 -0.2 -0.1 -0.1 YoY (%) 0% 4% 4% 6% 8% 5% 9% 7% 4% 0% 5% -5% -3% -1% 0% -2% 2% 0% -3% -4% -1% -1% China 3.8 3.9 3.7 3.7 3.9 3.8 4.0 4.0 3.9 4.1 4.0 4.2 4.0 3.9 4.2 4.1 4.1 4.0 3.9 4.1 4.0 4.0 YoY (0.2) 0.1 (0.1) 0.0 0.1 0.0 0.0 0.3 0.2 0.2 0.2 0.2 0.0 0.0 0.1 0.1 0.0 0.1 0.0 (0.1) 0.0 0.0 YoY (%) -4% 2% -1% 0% 3% 1% 1% 8% 6% 4% 5% 5% -1% 0% 2% 1% -1% 1% 0% -3% 0% -1% Other Emerging Asia 1.9 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.9 1.9 2.0 1.9 1.8 1.9 1.9 1.9 2.0 2.0 2.0 2.1 2.0 2.0 YoY 0.1 0.1 0.1 0.0 (0.1) 0.0 0.0 0.0 0.0 (0.1) 0.0 (0.1) (0.2) (0.1) 0.0 (0.1) 0.1 0.2 0.1 0.1 0.1 0.0 YoY (%) 4% 4% 3% 2% -3% 2% 0% -1% -1% -3% -1% -5% -9% -3% 1% -4% 5% 10% 6% 6% 7% 0% Middle East 1.4 1.4 1.3 1.4 1.3 1.3 1.4 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.1 1.1 1.2 1.2 1.2 1.2 YoY 0.0 (0.1) (0.1) (0.1) (0.1) (0.1) 0.0 0.0 (0.1) 0.0 0.0 (0.1) 0.0 0.0 0.0 0.0 (0.2) (0.2) (0.2) (0.2) (0.2) 0.0 YoY (%) -1% -6% -6% -4% -8% -6% 0% -1% -4% 0% -1% -5% -1% 2% 2% -1% -13% -13% -12% -12% -12% 0% South America 38.1 37.8 37.6 37.9 37.9 37.8 38.1 39.2 39.2 39.3 39.0 39.6 39.5 39.9 40.8 40.0 39.7 39.8 41.1 41.3 40.5 41.8 YoY (1.0) (0.3) (1.0) (0.5) 0.5 (0.3) 0.3 1.6 1.4 1.4 1.2 1.6 0.3 0.7 1.5 1.0 0.1 0.2 1.1 0.5 0.5 1.3 YoY (%) -3% -1% -3% -1% 1% -1% 1% 4% 4% 4% 3% 4% 1% 2% 4% 3% 0% 1% 3% 1% 1% 3% FSU & EM Europe 31.8 31.4 31.3 31.4 31.5 31.4 31.7 32.7 32.6 32.7 32.4 32.9 32.8 33.2 34.0 33.2 33.0 33.0 34.2 34.4 33.6 34.8 YoY (1.1) (0.4) (1.1) (0.5) 0.3 (0.4) 0.3 1.4 1.2 1.2 1.0 1.2 0.1 0.5 1.4 0.8 0.0 0.2 1.0 0.4 0.4 1.1 YoY (%) -3% -1% -3% -2% 1% -1% 1% 5% 4% 4% 3% 4% 0% 2% 4% 2% 0% 1% 3% 1% 1% 3% 2017 January 12 Africa 6.3 6.3 6.3 6.4 6.4 6.4 6.3 6.5 6.6 6.6 6.5 6.7 6.7 6.8 6.8 6.8 6.7 6.7 6.9 6.9 6.8 7.0 YoY 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.2 0.2 0.2 0.1 0.4 0.2 0.2 0.2 0.2 0.0 0.0 0.1 0.1 0.1 0.2 YoY (%) 0% 2% 1% 1% 2% 1% 0% 3% 3% 3% 2% 6% 3% 3% 3% 3% 0% 0% 1% 2% 1% 2%

36 Source: IEA, JODI, EIA, NBP, ANP, Credit Suisse Global Energy Team

Sector Gas Oil & China Global crude oil demand

Figure 99: World crude oil demand by region and key economics (mb/d) (mb/d) 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16 3Q16 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E 2018E Global 92.1 92.1 92.1 93.3 94.2 92.9 93.7 94.1 95.7 95.8 94.8 95.6 95.5 96.9 97.6 96.4 97.1 96.8 98.4 99.0 97.8 98.8

YoY 1.4 1.0 0.6 0.7 1.1 0.9 1.6 2.0 2.4 1.5 1.9 1.9 1.5 1.1 1.8 1.6 1.4 1.2 1.5 1.4 1.4 1.0 YoY (%) 1.6% 1.1% 0.7% 0.8% 1.2% 0.9% 1.7% 2.2% 2.6% 1.6% 2.0% 2.0% 1.5% 1.2% 1.9% 1.7% 1.5% 1.3% 1.6% 1.5% 1.5% 1.0% OECD 46.1 45.9 44.9 46.0 46.4 45.8 46.6 45.6 46.9 46.4 46.4 46.7 46.0 47.2 47.2 46.8 47.0 46.3 47.6 47.6 47.1 47.0 YoY 0.3 0.1 (0.7) (0.4) (0.1) (0.3) 0.7 0.7 0.9 0.0 0.6 0.1 0.4 0.3 0.8 0.4 0.3 0.3 0.4 0.4 0.3 (0.2) YoY (%) 0.6% 0.2% -1.6% -0.8% -0.3% -0.6% 1.5% 1.5% 1.9% 0.0% 1.2% 0.2% 0.9% 0.7% 1.7% 0.9% 0.7% 0.7% 0.8% 0.8% 0.7% -0.4% Americas 24.2 23.9 23.8 24.4 24.6 24.2 24.5 24.4 25.0 24.5 24.6 24.5 24.4 25.0 25.0 24.7 24.8 24.8 25.4 25.5 25.1 25.2 YoY 0.4 0.1 (0.2) 0.0 0.2 0.0 0.5 0.6 0.6 (0.1) 0.4 0.0 0.0 0.0 0.5 0.1 0.3 0.4 0.4 0.5 0.4 0.1 YoY (%) 1.9% 0.3% -0.7% 0.2% 0.9% 0.2% 2.2% 2.7% 2.3% -0.4% 1.7% 0.2% -0.2% 0.1% 1.9% 0.5% 1.2% 1.7% 1.7% 1.9% 1.6% 0.3% Europe 13.8 13.3 13.7 14.2 13.7 13.7 13.7 13.8 14.4 14.0 14.0 13.9 14.2 14.7 14.1 14.2 13.9 14.1 14.7 14.1 14.2 14.0 YoY (0.3) 0.0 (0.4) 0.0 0.0 (0.1) 0.4 0.1 0.3 0.2 0.2 0.2 0.4 0.3 0.1 0.2 0.0 (0.1) 0.0 0.0 0.0 (0.1) YoY (%) -1.8% -0.3% -2.5% -0.2% -0.2% -0.8% 2.7% 0.8% 1.9% 1.5% 1.7% 1.5% 2.7% 1.8% 1.1% 1.8% -0.1% -0.6% -0.2% -0.1% -0.2% -1.0% Asia Pacific 8.1 8.6 7.4 7.4 8.1 7.9 8.5 7.4 7.5 8.0 7.8 8.3 7.4 7.5 8.1 7.9 8.3 7.4 7.5 8.1 7.8 7.7 YoY 0.1 0.1 (0.2) (0.4) (0.3) (0.2) (0.2) (0.1) 0.1 (0.1) (0.1) (0.1) 0.1 0.1 0.2 0.0 0.0 0.0 0.0 (0.1) 0.0 (0.1) YoY (%) 0.8% 0.7% -3.0% -4.7% -3.9% -2.7% -2.2% -0.9% 0.7% -1.5% -1.0% -1.7% 0.9% 0.8% 2.2% 0.5% 0.4% -0.3% -0.5% -0.8% -0.3% -1.2% Non-OECD 46.0 46.2 47.2 47.3 47.8 47.1 47.1 48.5 48.8 49.3 48.5 48.9 49.6 49.6 50.4 49.6 50.0 50.5 50.8 51.4 50.7 51.9 YoY 1.2 0.9 1.4 1.1 1.2 1.2 0.9 1.3 1.5 1.5 1.3 1.8 1.1 0.8 1.0 1.2 1.1 0.9 1.2 1.0 1.1 1.2 YoY (%) 2.6% 2.1% 3.0% 2.3% 2.6% 2.5% 2.0% 2.8% 3.3% 3.2% 2.8% 3.9% 2.2% 1.6% 2.1% 2.4% 2.3% 1.9% 2.4% 2.1% 2.1% 2.3% China 10.4 10.3 10.7 10.7 11.2 10.7 10.9 11.3 11.3 11.5 11.2 11.6 12.0 11.6 12.2 11.9 12.0 12.3 12.2 12.5 12.3 12.6 YoY 0.2 (0.1) 0.3 0.3 0.6 0.3 0.6 0.6 0.6 0.3 0.5 0.7 0.8 0.4 0.7 0.6 0.5 0.3 0.5 0.3 0.4 0.3 YoY (%) 2.4% -1.2% 2.8% 3.0% 5.5% 2.6% 5.4% 5.8% 5.7% 3.1% 5.0% 6.3% 6.9% 3.4% 5.6% 5.5% 4.1% 2.4% 4.5% 2.7% 3.4% 2.4% Other Emerging Asia 11.7 12.0 12.2 11.7 11.9 11.9 12.3 12.7 12.4 12.7 12.6 13.2 13.3 12.9 13.0 13.1 13.6 13.7 13.3 13.5 13.5 13.7 YoY 0.2 0.4 0.5 0.2 0.1 0.3 0.3 0.6 0.7 0.8 0.6 0.9 0.6 0.5 0.3 0.5 0.3 0.4 0.5 0.5 0.4 0.2 YoY (%) 2.1% 3.2% 4.4% 2.0% 0.4% 2.5% 2.9% 4.6% 5.8% 7.1% 5.1% 7.0% 4.3% 4.0% 2.1% 4.3% 2.5% 2.6% 3.7% 3.6% 3.1% 1.6% Middle East 8.6 8.5 9.0 9.2 8.7 8.9 8.6 9.3 9.6 9.1 9.2 8.7 9.0 9.4 9.3 9.1 8.7 9.0 9.4 9.2 9.1 9.4 YoY 0.2 0.3 0.3 0.2 0.4 0.3 0.0 0.3 0.4 0.4 0.3 0.1 -0.3 -0.2 0.1 -0.1 0.0 0.0 0.0 -0.1 0.0 0.3 YoY (%) 3.0% 3.4% 3.9% 2.0% 5.0% 3.5% 0.4% 3.4% 4.1% 4.8% 3.2% 1.2% -2.9% -2.0% 1.5% -0.6% 0.1% 0.2% 0.1% -0.9% -0.1% 3.7% South America 6.5 6.4 6.6 6.8 6.7 6.6 6.4 6.5 6.6 6.5 6.5 6.2 6.4 6.5 6.3 6.3 6.3 6.4 6.5 6.4 6.4 6.5 YoY 0.2 0.2 0.1 0.2 0.1 0.1 0.0 0.0 (0.2) (0.2) (0.1) (0.2) (0.2) 0.0 (0.2) (0.2) 0.1 0.0 0.0 0.1 0.0 0.1 YoY (%) 3.6% 2.8% 2.2% 2.4% 1.4% 2.2% 0.1% -0.7% -3.0% -3.6% -1.8% -3.4% -2.8% -0.6% -2.7% -2.3% 1.5% 0.5% -0.4% 1.1% 0.7% 1.7% FSU & EM Europe 5.1 5.0 4.9 5.2 5.4 5.1 4.7 4.7 5.1 5.3 5.0 4.9 4.7 5.1 5.3 5.0 5.0 4.8 5.1 5.3 5.0 5.1 YoY 0.0 0.3 0.0 0.0 0.0 0.1 (0.2) (0.3) (0.1) (0.1) (0.2) 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.1 0.0 YoY (%) -1.0% 5.7% 0.6% -0.7% 0.5% 1.4% -4.9% -5.1% -2.7% -1.4% -3.5% 3.1% -0.3% -0.3% -0.3% 0.5% 1.6% 1.9% 0.5% 0.9% 1.2% 0.9%

12 January 2017 January 12 Africa 3.8 4.0 3.8 3.7 3.9 3.8 4.2 4.0 3.9 4.2 4.1 4.4 4.2 4.1 4.3 4.2 4.5 4.3 4.2 4.5 4.4 4.6 YoY 0.3 0.0 0.1 0.2 0.0 0.1 0.2 0.1 0.2 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.2 0.2 0.2 0.2 YoY (%) 7.4% -0.9% 2.2% 6.6% 1.1% 2.1% 5.0% 3.5% 6.3% 6.7% 5.4% 5.6% 4.8% 4.2% 3.6% 4.6% 2.7% 3.5% 4.2% 4.9% 3.8% 3.7%

37 Source: IEA, JODI, EIA, NBP, ANP, Credit Suisse Global Energy Team

12 January 2017

Companies

China Oil & Gas Sector 38 12 January 2017

Asia Pacific/China Oil & Gas Exploration & Production

CNOOC (0883.HK / 883 HK) Rating (from UNDERPERFORM) OUTPERFORM Price (10-Jan-17, HK$) 9.73 UPGRADE RATING Target price (HK$) (from 7.00) 12.80 Upside/downside (%) 31.6

Mkt cap (HK$/US$ mn) 434,420 / 56,022 Cheap, with a huge underperformance Enterprise value (Rmb mn) 459,835 Number of shares (mn) 44,647 ■ Laggard. CNOOC has significantly underperformed oil prices and global peers Free float (%) 35.6 since the OPEC deal announcement on 30 November 2016, consistent with our 52-wk price range (HK$) 10.70-6.42 Underperform call, with the market concerned about deteriorating production and ADTO-6M (US$ mn) 76.6 low reserve life. We expect a reversal of the underperformance trend, hence we Target price is for 12 months.

upgrade the stock to OUTPERFORM (from Underperform). The upcoming 2017 Research Analysts Strategy Preview would be a near-term catalyst that would trigger the reversal.

Horace Tse ■ Two mega-size discoveries should address concerns on low reserve 852 2101 7379 life. CNOOC’s partner, ExxonMobil, has announced two significant [email protected] discoveries in late 2016 which might have been missed by the market. The Jessie Xu 852 2101 7650 first one is the Liza discovery in offshore Guyana (CNOOC owns 25%) with a [email protected] potential recoverable resource of 1.4 bn barrels; operator ExxonMobil has announced that it has submitted an application for a production licence and initial development plan early December. The second one is Owowo field in offshore Nigeria (CNOOC owns 18%) with a potential recoverable resource of 1 bn barrels, where operator ExxonMobil announced the discovery in Nov-2016. Based on our initial assessment, these two discoveries alone could bring c.250mmboe of reserve adds to CNOOC and raise its oil reserve life to nine years (from seven currently). ■ Market too pessimistic on production decline. At the upcoming 2017 Strategy Preview, consensus is expecting CNOOC to revise down 2017 volumes to a 5-8% YoY decline amid deterioration in domestic production, which we think is too negative. We also expect CNOOC to announce a 15% increase in 2017 capex to combat on the production decline. ■ Upgrade to OUTPERFORM (from Underperform), new TP HK$12.8. Our TP is raised to HK$12.8 (from HK$7.0) as we: (1) roll forward our DCF valuation to 2017 and update our capex assumption in our terminal value, a reflection of global OFS cost deflation, echoed by Statoil EVP for Exploration Tim Dodson’s comment that “now is a very good time to explore, because [oilfield service fees] hasn’t been cheaper than this for many, many years”; and (2) update CS house view RMB/USD forecast of 7.33 in our model. Our 2016-18 EPS is raised by 3-7% after updating our cost assumptions. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 171,437.0 160,056.8 189,357.4 220,691.9 EBITDA (Rmb mn) 90,895.0 70,910.8 107,251.9 124,957.2 EBIT (Rmb mn) 17,456.0 (3,925.1) 31,179.1 55,405.7 Net profit (Rmb mn) 20,246.0 1,432.1 24,228.3 42,161.7 EPS (CS adj.) (Rmb) 0.45 0.03 0.54 0.94 Change from previous EPS (%) n.a. - 6.9 2.7 Consensus EPS (Rmb) n.a. 0.02 0.58 0.89 EPS growth (%) (66.4) (92.9) 1591.8 74.0 The price relative chart measures performance against the P/E (x) 19.1 270.6 16.0 9.2 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 5.7 4.2 2.4 4.3 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 5.7 6.5 4.1 3.7

Performance 1M 3M 12M P/B (x) 1.00 1.03 1.08 1.17 Absolute (%) -3.7 -3.3 39.2 ROE (%) 5.3 0.4 6.6 12.2 Relative (%) -6.3 -1.7 21.4 Net debt/equity (%) 34.9 19.4 14.9 22.4

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 39 12 January 2017

CNOOC (0883.HK / 883 HK) Price (10 Jan 2017): HK$9.73; Rating: (from UNDERPERFORM) OUTPERFORM; Target Price: (from HK$7.00) HK$12.80; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Company Background Brent price (USD/bbl) 52.43 44.53 56.25 65.00 CNOOC is a leading E&P producer globally and largest E&P Oil & gas production volume (mmboe) 496.1 476.9 454.6 465.9 producer in Offshore China. CNOOC engages in exploration, Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E development & production in Offshore China, and also has assets in Sales revenue 171,437 160,057 189,357 220,692 Indonesia, Australia, Nigeria, Argentina, North Sea, Canada and the Cost of goods sold 28,372 26,909 26,938 28,987 US. EBITDAX 100,795 81,306 118,686 137,535 Exploration expense 9,900 10,395 11,435 12,578 Blue/Grey Sky Scenario EBITDA 90,895 70,911 107,252 124,957 Depreciation & amortisation 73,439 74,836 76,073 69,551 EBIT 17,456 (3,925) 31,179 55,406 Net interest expense/(inc.) 5,245 4,643 4,260 4,667 Recurring PBT 17,130 (3,480) 32,304 56,216 Profit after tax 20,246 1,432 24,228 42,162 Reported net profit 20,246 1,432 24,228 42,162 Net profit (Credit Suisse) 20,246 1,432 24,228 42,162 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 11,867 73,731 92,919 72,547 Current receivables 21,829 20,185 22,841 24,618 Inventories 9,263 8,217 9,838 10,986 Other current assets 97,252 73,474 56,835 56,835 Current assets 140,211 175,607 182,433 164,986 Property, plant & equip. 454,141 426,281 418,972 424,076 Investments 28,413 21,310 15,982 11,987 Intangibles 16,423 16,423 16,423 16,423 Other non-current assets 25,174 15,609 13,289 11,545 Total assets 664,362 655,230 647,099 629,017 Current liabilities 84,380 83,402 90,128 98,945 Total liabilities 278,321 278,856 287,281 298,009 Shareholders' equity 386,041 376,374 359,818 331,007 Minority interests 0 0 0 0 Total liabilities & equity 664,362 655,230 647,099 629,017 Our Blue Sky Scenario (HK$) 15.40 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E We get our blue sky scenario target price by assuming long-term oil EBIT 17,456 (3,925) 31,179 55,406 price of US$70/bbl. Net interest 6,930 6,867 6,677 6,513 Tax paid (16,000) 4,912 (8,076) (14,054) Working capital (492) 27,134 16,431 4,116 Our Grey Sky Scenario (HK$) 10.20 Other cash & non-cash items 72,201 115,313 126,350 112,716 We get our grey sky scenario target price by assuming long-term oil Operating cash flow 80,095 150,302 172,561 164,696 price of US$60/bbl. Capex (67,674) (60,000) (69,000) (75,000) Free cash flow to the firm 12,421 90,302 103,561 89,696 Investing cash flow (76,495) (56,982) (66,078) (72,267) Share price performance Equity raised 0 0 0 0 Dividends paid Financing cash flow (6,893) (19,588) (13,564) (19,882) Total cash flow (3,293) 73,731 92,919 72,547 Adjustments 242 0 0 0 Net change in cash (3,051) 73,731 92,919 72,547 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 44,647 44,647 44,647 44,647 EPS (Credit Suisse) (Rmb) 0.45 0.03 0.54 0.94 DPS (Rmb) 0.50 0.36 0.21 0.37 Operating CFPS (Rmb) 1.79 3.37 3.86 3.69 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (37.6) (6.6) 18.3 16.5 EBIT (78.4) (122.5) 894.3 77.7 The price relative chart measures performance against the MSCI CHINA F IDX EPS (66.4) (92.9) 1591.8 74.0 which closed at 6,226.42 on 10-Jan-2017 Margins (%) On 10-Jan-2017 the spot exchange rate was HK$7.75/US$1 EBITDAX 58.8 50.8 62.7 62.3 EBITDA 53.0 44.3 56.6 56.6 EBIT 10.2 (2.5) 16.5 25.1 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 19.1 270.6 16.0 9.2 P/B 1.00 1.03 1.08 1.17 Dividend yield (%) 5.7 4.2 2.4 4.3 EV/sales 3.0 2.9 2.3 2.1 EV/EBITDA 5.7 6.5 4.1 3.7 EV/EBIT 29.9 (117.3) 14.2 8.3 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 5.3 0.4 6.6 12.2 ROIC 4.1 0.3 5.4 10.2 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 34.9 19.4 14.9 22.4 Net debt/EBITDA (x) 1.48 1.03 0.50 0.59

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 40 12 January 2017

Asia Pacific/China Integrated Oil & Gas

Sinopec (0386.HK / 386 HK) Rating (from NEUTRAL) OUTPERFORM Price (10-Jan-17, HK$) 5.90 UPGRADE RATING Target price (HK$) (from 6.10) 7.30 Upside/downside (%) 23.7

Mkt cap (HK$/US$ mn) 782,484 / 100,908 Marketing revaluation in sight Enterprise value (Rmb mn) 856,449 ■ Re-focusing on divestments. We get the impression that Sinopec is re- Number of shares (mn) 121,071 Free float (%) 26.1 accelerating on restructuring and reforms, which is consistent with the SOE 52-wk price range (HK$) 5.95-3.88 reform that China is re-emphasising. The completion of the Sichuan-East gas ADTO-6M (US$ mn) 60.6 pipeline transaction in December 2016 means that Sinopec can now focus on Target price is for 12 months. the marketing spin-off, which is the next and biggest in the pipeline. Reuters Research Analysts reported that Sinopec has appointed investment banks for a listing that could Horace Tse raise as much as US$12 bn. Over the next 6-9 months, we expect Sinopec to 852 2101 7379 [email protected] see further development and collaboration on its non-fuel business, which we Jessie Xu think will be the key share price driver through 2017. 852 2101 7650 ■ Undervalued marketing business. Oil retail marketing businesses are [email protected]

undervalued within an integrated oil particularly in a lower oil price environment; so it is becoming the norm to divest it so as to crystallise valuation. We are also seeing regional peers pushing forward on this, including PTT in Thailand and BP bidding for Woolworths' retail stations in Australia. Sinopec’s marketing division has a dominant position (60% market share), higher potential on its non-fuel business side (only 3% of total revenue vs c.30% for developed markets), and is the best vehicle to tap into the fastest growing fuel market in the world. We update our marketing division valuation estimates, applying an 18x P/E (vs 14x P/E from its divestment in 2014) which we believe reflects the market value from the latest comps (20x P/E) and the recent BP-Woolworths transaction (22x P/E). ■ Upgrade to OUTPERFORM (from Neutral); new TP HK$7.3. Our SoTP- based TP is raised to HK$7.3 (from HK$6.1) as we: (1) raise our marketing valuation multiple to 18x (from 14x); (2) roll forward our E&P DCF valuation to 2017 and reduce our capex assumption in our terminal value, a reflection of global OFS cost deflation post the downturn; (3) roll forward our downstream valuation to 2017 multiples and keep our target multiples unchanged—refining at 7x EV/EBITDA and chemical at 5x EV/EBITDA; (4) update CS house view RMB/USD forecast of 7.33 in our SoTP valuation. Our 2016-18 EPS is raised by 7-17% on higher marketing non-fuel business earnings and chemical earnings. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 2,018,883.0 2,056,047.9 2,419,484.0 2,736,752.4 EBITDA (Rmb mn) 153,396.0 160,768.6 190,590.0 203,837.3 EBIT (Rmb mn) 57,028.0 66,371.4 91,906.5 104,445.8 Net profit (Rmb mn) 32,438.0 56,606.1 63,682.6 73,270.5 EPS (CS adj.) (Rmb) 0.27 0.47 0.53 0.61 Change from previous EPS (%) n.a. 6.5 16.3 17.4 Consensus EPS (Rmb) n.a. 0.33 0.41 0.49 EPS growth (%) (32.5) 74.2 12.5 15.1 P/E (x) 19.6 11.3 10.0 8.7 The price relative chart measures performance against the Dividend yield (%) 2.9 4.4 5.0 5.7 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. On EV/EBITDA (x) 5.8 5.3 4.4 3.9 10/01/17 the spot exchange rate was HK$7.75/US$1 P/B (x) 0.94 0.88 0.84 0.80 Performance 1M 3M 12M ROE (%) 5.1 8.1 8.6 9.5 Absolute (%) 5.4 3.7 39.8 Net debt/equity (%) 23.9 18.8 15.0 11.3 Relative (%) 2.8 5.4 22.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 41 12 January 2017

Sinopec (0386.HK / 386 HK) Price (10 Jan 2017): HK$5.90; Rating: (from NEUTRAL) OUTPERFORM; Target Price: (from HK$6.10) HK$7.30; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Company Background Average daily equity t/o (HK bn) 6.49 6.94 6.94 6.94 Sinopec is a leading integrated oil & gas and the largest Turnover velocity (%) 52.43 44.53 56.25 65.00 downstream producer in China. Its principal operations include Derivatives t/o growth (YoY%) -1.71 -7.61 -5.50 -0.60 exploration & production of oil & gas, refining & marketing of refined Stable revenue growth (YoY%) 3.33 5.63 4.15 4.14 products and chemicals, and natural gas transmission. Cost-income ratio (%) 272.7 260.0 280.0 250.0 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Blue/Grey Sky Scenario Sales revenue 2,018,883 2,056,048 2,419,484 2,736,752 Cost of goods sold 1,492,926 1,520,409 1,789,163 2,023,777 EBITDAX 153,396 160,769 190,590 203,837 Exploration expense 0 0 0 0 EBITDA 153,396 160,769 190,590 203,837 Depreciation & amortisation 96,368 94,397 98,683 99,391 EBIT 57,028 66,371 91,907 104,446 Net interest expense/(inc.) 9,276 4,196 3,384 2,589 Recurring PBT 56,277 88,443 98,882 113,470 Profit after tax 43,664 68,621 76,721 88,039 Reported net profit 32,438 56,606 63,683 73,270 Net profit (Credit Suisse) 32,438 56,606 63,683 73,270 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 67,824 57,773 63,082 60,452 Current receivables 67,075 62,023 70,185 75,644 Inventories 145,498 129,061 154,537 172,566 Other current assets 52,008 49,444 47,009 44,695 Current assets 332,405 298,301 334,813 353,357 Property, plant & equip. 884,853 890,856 906,172 930,281 Investments 82,970 111,511 111,511 111,511 Intangibles 6,271 5,644 5,644 5,644 Other non-current assets 136,630 148,359 140,207 132,803 Total assets 1,443,129 1,454,671 1,498,347 1,533,596 Current liabilities 462,642 449,025 466,403 478,789 Total liabilities 658,910 609,169 607,966 591,811 Our Blue Sky Scenario (HK$) 8.76 Shareholders' equity 674,029 723,297 755,138 791,774 We derive our blue sky scenario by assuming higher oil price than Minority interests 110,190 122,205 135,243 150,011 CS base case (US$56/bbl in 2017) and fast developing of non-fuel Total liabilities & equity 1,443,129 1,454,671 1,498,347 1,533,596 business. Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 57,028 66,371 91,907 104,446 Net interest 0 0 0 0 Our Grey Sky Scenario (HK$) 5.84 Tax paid (13,999) (19,822) (22,162) (25,431) Our grey sky scenario is derived from assuming lower oil price than Working capital 11,611 6,666 (17,559) (12,501) CS base case (US$56/bbl in 2017) and refining margin squeeze on Other cash & non-cash items 111,178 114,453 107,788 111,661 fierce competitions from teapot refineries. Operating cash flow 165,818 167,668 159,973 178,175 Capex (95,454) (100,400) (114,000) (123,500) Free cash flow to the firm 70,364 67,268 45,973 54,675 Share price performance Investing cash flow (116,952) (110,441) (148,993) (157,814) Equity raised 0 0 0 0 Dividends paid Financing cash flow 71,906 (28,988) 14,329 7,009 Total cash flow 120,772 28,240 25,309 27,370 Adjustments 293 0 0 0 Net change in cash 121,065 28,240 25,309 27,370 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 120,853 121,071 121,071 121,071 EPS (Credit Suisse) (Rmb) 0.27 0.47 0.53 0.61 DPS (Rmb) 0.15 0.23 0.26 0.30 Operating CFPS (Rmb) 1.37 1.38 1.32 1.47 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (28.6) 1.8 17.7 13.1 The price relative chart measures performance against the MSCI CHINA F IDX EBIT (22.4) 16.4 38.5 13.6 which closed at 6,226.42 on 10-Jan-2017 EPS (32.5) 74.2 12.5 15.1 On 10-Jan-2017 the spot exchange rate was HK$7.75/US$1 Margins (%) EBITDAX 7.6 7.8 7.9 7.4 EBITDA 7.6 7.8 7.9 7.4 EBIT 2.8 3.2 3.8 3.8 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 19.6 11.3 10.0 8.7 P/B 0.94 0.88 0.84 0.80 Dividend yield (%) 2.9 4.4 5.0 5.7 EV/sales 0.4 0.4 0.3 0.3 EV/EBITDA 5.8 5.3 4.4 3.9 EV/EBIT 15.5 12.9 9.1 7.7 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 5.1 8.1 8.6 9.5 ROIC 4.6 5.2 7.0 7.8 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 23.9 18.8 15.0 11.3 Net debt/EBITDA (x) 1.22 0.99 0.70 0.52

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 42 12 January 2017

Asia Pacific/China Integrated Oil & Gas

PetroChina (0857.HK / 857 HK) Rating NEUTRAL Price (10-Jan-17, HK$) 6.18 INCREASE TARGET PRICE Target price (HK$) (from 6.30) 7.00 Upside/downside (%) 13.3

Mkt cap (HK$/US$ mn) 1,654,981 / 213,425 Pipeline rerating expectations in the price Enterprise value (Rmb mn) 2,005,982 Number of shares (mn) 183,021 ■ Losing stream. We believe that the market has priced in a lot of Free float (%) 98.6 expectations on the gas pipeline revaluation potential so further upside is 52-wk price range (HK$) 6.18-4.16 ADTO-6M (US$ mn) 71.4 limited, in our opinion. PetroChina has long been open to the idea of selling Target price is for 12 months. stakes in its pipeline assets to crystallise valuation, and the restructuring in Research Analysts December 2015 has already set it up for further sell-down by streamlining the Horace Tse complicated ownership structure. The nature of gas pipeline assets (yield 852 2101 7379 [email protected] play, stable cash flow generation, minimal incremental capex required) also Jessie Xu fits insurance companies’ appetite. A further sell-down of the pipeline 852 2101 7650 company stake is likely in 2017, in our view. [email protected] ■ We see intrinsic value in PetroChina’s pipeline. In our model we apply the

implied valuation from Sinopec’s gas pipeline transaction (20x P/E or 2.3x Asset), valuing PetroChina’s pipeline segment at HK$5.8/sh or implying 1.8x- 3.2x P/B. Arguably, PetroChina’s gas pipelines should deserve at least an at- par valuation on a like-for-like basis, given that PetroChina’s gas pipelines have: (1) higher earnings growth potential as its pipelines are still at 75% utilisation post W-E III start-up in 2017, while Sinopec’s are already at full utilisation; (2) higher margins vs Sinopec’s, as Sinopec’s are of higher cost due to the additional desulphurisation process for the high sulphur gas content from Puguang. ■ Maintain NEUTRAL, new TP HK$7.0. Our SoTP-based TP is raised to HK$7.0 (from HK$6.3) as we: (1) roll forward our E&P DCF valuation to 2017 and reduce our capex assumption in our terminal value, a reflection of global OFS cost deflation post the downturn; (2) roll forward our downstream valuation to 2017 multiples, with our target multiples unchanged at 4x EV/EBITDA for refining & chemical and 3x EV/EBITDA for marketing; and (3) update CS house view's RMB/USD forecast of 7.33 in our SoTP valuation. Our 2016 EPS is lowered by 19% as we mark-to-market actual oil prices, while 2017-18 EPS are unchanged.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 1,725,428.0 1,564,150.6 1,984,189.6 2,285,885.0 EBITDA (Rmb mn) 282,127.0 256,230.5 282,461.2 325,362.9 EBIT (Rmb mn) 79,252.0 68,111.1 83,413.4 125,426.6 Net profit (Rmb mn) 35,517.0 4,315.9 13,955.5 44,425.8 EPS (CS adj.) (Rmb) 0.19 0.02 0.08 0.24 Change from previous EPS (%) n.a. (18.8) - 0.2 Consensus EPS (Rmb) n.a. 0.05 0.28 0.44 EPS growth (%) (66.9) (87.8) 223.4 218.3 P/E (x) 28.4 233.8 72.3 22.7 The price relative chart measures performance against the Dividend yield (%) 1.6 0.9 0.8 2.0 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. On EV/EBITDA (x) 6.9 7.8 7.1 6.1 10/01/17 the spot exchange rate was HK$7.75/US$1 P/B (x) 0.98 0.99 0.98 0.96 Performance 1M 3M 12M ROE (%) 3.5 0.4 1.4 4.3 Absolute (%) 12.8 16.0 41.2 Net debt/equity (%) 34.8 39.6 39.1 37.9 Relative (%) 10.2 17.7 23.4 Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 43 12 January 2017

PetroChina (0857.HK / 857 HK) Price (10 Jan 2017): HK$6.18; Rating: NEUTRAL; Target Price: (from HK$6.30) HK$7.00; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Company Background Brent price (USD/bbl) 52.30 44.02 56.25 65.00 PetroChina is China's largest oil & gas producer and one of the Oil & gas production volume (mm boe) 2.99 -4.49 2.18 0.22 largest globally. It principally engages in the exploration, Refining margin (Rmb/bbl) 1.00 1.00 1.00 - development AND production of oil & gas, refining & marketing of Chemical margin (Rmb/ton) 6.10 301.2 143.3 71.63 refined products and chemicals, and natural gas transmission. Exchange rate (Rmb/USD) 6.28 6.64 6.98 6.98

Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Blue/Grey Sky Scenario Sales revenue 1,725,428 1,564,151 1,984,190 2,285,885 Cost of goods sold 1,056,795 974,582 1,325,201 1,549,821 EBITDAX 300,507 273,776 300,694 342,551 Exploration expense 18,380 17,546 18,233 17,188 EBITDA 282,127 256,231 282,461 325,363 Depreciation & amortisation 202,875 188,119 199,048 199,936 EBIT 79,252 68,111 83,413 125,427 Net interest expense/(inc.) 22,309 20,591 21,332 21,749 Recurring PBT 57,815 48,813 63,665 106,058 Profit after tax 42,089 37,064 48,341 80,530 Reported net profit 35,517 4,316 13,956 44,426 Net profit (Credit Suisse) 35,517 4,316 13,956 44,426 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 72,773 110,522 146,540 186,045 Current receivables 52,262 47,377 60,100 69,238 Inventories 126,877 151,042 205,381 240,193 Other current assets 97,432 65,562 88,036 102,612 Current assets 349,344 374,502 500,056 598,087 Property, plant & equip. 1,784,905 1,788,786 1,799,938 1,828,201 Investments 73,845 75,138 76,721 79,101 Intangibles 98,272 0 0 0 Other non-current assets 87,478 185,750 185,750 185,750 Total assets 2,393,844 2,424,175 2,562,465 2,691,140 Current liabilities 471,407 456,812 558,944 633,185 Total liabilities 1,049,810 1,085,215 1,217,347 1,321,588 Our Blue Sky Scenario (HK$) 8.40 Shareholders' equity 1,028,084 1,023,010 1,029,168 1,053,602 Our blue sky scenario is derived from assuming long-term oil price Minority interests 164,318 164,318 164,318 164,318 of US$70/bbl. Total liabilities & equity 2,393,844 2,424,175 2,562,465 2,691,140 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E Our Grey Sky Scenario (HK$) 5.60 EBIT 79,252 68,111 83,413 125,427 Our grey sky scenario is derived from assuming long-term oil price Net interest (22,309) (20,591) (21,332) (21,749) of US$60/bbl. Tax paid (14,764) (11,749) (11,749) (15,324) Working capital (6,847) (51,441) 6,524 3,013 Other cash & non-cash items 225,980 208,710 220,380 221,685 Share price performance Operating cash flow 261,312 193,041 277,236 313,052 Capex (202,238) (192,000) (210,200) (228,200) Free cash flow to the firm 59,074 1,041 67,036 84,852 Investing cash flow (215,879) (190,545) (207,990) (225,269) Equity raised 0 0 0 0 Dividends paid Financing cash flow (45,439) 35,252 (33,228) (48,279) Total cash flow (6) 37,749 36,018 39,505 Adjustments (999) 0 0 0 Net change in cash (1,005) 37,749 36,018 39,505 Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 183,021 183,021 183,021 183,021 EPS (Credit Suisse) (Rmb) 0.19 0.02 0.08 0.24 DPS (Rmb) 0.09 0.05 0.04 0.11 Operating CFPS (Rmb) 1.43 1.05 1.51 1.71 The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6,226.42 on 10-Jan-2017 Earnings 12/15A 12/16E 12/17E 12/18E On 10-Jan-2017 the spot exchange rate was HK$7.75/US$1 Growth (%) Sales revenue (24.4) (9.3) 26.9 15.2 EBIT (53.3) (14.1) 22.5 50.4 EPS (66.9) (87.8) 223.4 218.3 Margins (%) EBITDAX 17.4 17.5 15.2 15.0 EBITDA 16.4 16.4 14.2 14.2 EBIT 4.6 4.4 4.2 5.5 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 28.4 233.8 72.3 22.7 P/B 0.98 0.99 0.98 0.96 Dividend yield (%) 1.6 0.9 0.8 2.0 EV/sales 1.1 1.3 1.0 0.9 EV/EBITDA 6.9 7.8 7.1 6.1 EV/EBIT 24.5 29.5 24.0 15.9 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 3.5 0.4 1.4 4.3 ROIC 3.2 2.8 3.4 5.1 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 34.8 39.6 39.1 37.9 Net debt/EBITDA (x) 1.66 2.07 1.86 1.60

Source: Company data, Thomson Reuters, Credit Suisse estimates China Oil & Gas Sector 44 12 January 2017

Asia Pacific/China Oil & Gas Equipment & Services

COSL (2883.HK / 2883 HK) Rating OUTPERFORM Price (10-Jan-17, HK$) 7.62 DECREASE TARGET PRICE Target price (HK$) (from 10.00) 9.00 Upside/downside (%) 18.1

Mkt cap (HK$/US$ mn) 57,139 / 7,369 We expect COSL to return to profit-making as oil Enterprise value (Rmb mn) 74,591 Number of shares (mn) 4,772 price normalises Free float (%) 49.5 52-wk price range (HK$) 8.04-4.80 ■ Oil price could overshoot post OPEC deal. The OPEC deal should trigger ADTO-6M (US$ mn) 16.8 a 0.8-1.2mb/d of counter-seasonal inventory drawdown in 1H17 that would Target price is for 12 months. accelerate the rebalance of global oil market. Oil prices should see positive

Research Analysts momentum as we run into peak summer demand in mid-2017. The improved

Horace Tse outlook for oil prices should give oil companies more flexibility in setting their 852 2101 7379 2017 capex budget, particularly where domestic production is deteriorating. [email protected] Jessie Xu ■ Ride on CNOOC’s capex recovery. We expect CNOOC to announce a 15% 852 2101 7650 increase in capex at its 2017 Strategy Preview meeting at the end of January. [email protected] On the back of this we expect COSL’s Offshore China work volume to pick up and utilisation to reach c.70% in 2017, sufficient to drive an earnings recovery back to profit-making in 2017 for COSL. On top of that, its biggest overseas customer, Statoil, has announced a plan to increase exploration activities by 30% in 2017. 4Q16 results should see a decline QoQ due to seasonality plus potential kitchen sinking of costs, but this will not derail our recovery thesis. ■ Focused management execution capability. COSL’s management has been clearly focused on cost discipline and has shown excellent execution under the challenging operating environment. Despite the downturn, COSL is generating Rmb2 bn of free cash flow, which will help get its balance sheet deleveraged. COSL’s net gearing is at 57% which places it below the global peers average of 65%. ■ Maintain OUTPERFORM, new TP HK$9.0 (lowered from HK$10.0). We roll forward our valuation to 2017 multiples with our target multiples unchanged at 1.1x P/B and update RMB/USD exchange rate to 7.33. COSL is our preferred pick among the OFS space given its strong balance sheet. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 23,174.2 19,168.9 21,989.6 23,585.8 EBITDA (Rmb mn) 5,837.0 3,863.5 6,285.1 6,960.8 EBIT (Rmb mn) 1,623.6 (1,378.7) 1,131.0 1,554.8 Net profit (Rmb mn) 142.8 (9,133.2) 944.3 1,196.3 EPS (CS adj.) (Rmb) 0.03 (1.91) 0.20 0.25 Change from previous EPS (%) n.a. - (0.0) (0.0) Consensus EPS (Rmb) n.a. (2.01) (0.02) 0.24 EPS growth (%) (98.1) 26.7 The price relative chart measures performance against the P/E (x) 227.2 (3.6) 34.3 27.1 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 1.0 0.4 0.6 0.9 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 12.6 19.3 11.6 10.1

Performance 1M 3M 12M P/B (x) 0.69 0.87 0.85 0.83 Absolute (%) 0.5 -0.9 37.8 ROE (%) 0.3 (21.7) 2.5 3.1 Relative (%) 0.2 3.2 22.4 Net debt/equity (%) 48.2 63.3 57.4 48.9

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 45 12 January 2017

COSL (2883.HK / 2883 HK) Price (10 Jan 2017): HK$7.62; Rating: OUTPERFORM; Target Price: (from HK$10.00) HK$9.00; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Drilling EBIT margin 8.03 -12.43 3.54 7.45 Shares (wtd avg.) (mn) 4,772 4,772 4,772 4,772 Geophysical EBIT margin -3.42 -2.27 15.59 13.41 EPS (Credit Suisse) 0.03 (1.91) 0.20 0.25 - - - - (Rmb)DPS (Rmb) 0.07 0.03 0.04 0.06 - - - - BVPS (Rmb) 9.80 7.82 7.97 8.16 - - - - Operating CFPS (Rmb) 1.60 0.84 1.17 1.30 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 23,174 19,169 21,990 23,586 P/E 227.2 (3.6) 34.3 27.1 Cost of goods sold 9,535 7,707 7,712 8,189 P/B 0.69 0.87 0.85 0.83 SG & A 2,538 2,523 2,736 2,968 Dividend yield (%) 1.0 0.4 0.6 0.9 Other operating exp./(inc.) 5,264 5,075 5,256 5,468 P/CF 4.3 8.1 5.8 5.2 EBITDAX 5,837 3,864 6,285 6,961 EV/sales 3.2 3.9 3.3 3.0 Exploration expense 0 0 0 0 EV/EBITDA 12.6 19.3 11.6 10.1 EBITDA 5,837 3,864 6,285 6,961 EV/EBIT 45.3 (54.1) 64.4 45.1 Depreciation & amortisation 4,213 5,242 5,154 5,406 Earnings 12/15A 12/16E 12/17E 12/18E EBIT 1,624 (1,379) 1,131 1,555 Growth (%) Net interest expense/(inc.) 507 840 396 546 Sales revenue (29.8) (17.3) 14.7 7.3 Associates/JV 272 367 367 367 EBIT (80.7) (184.9) 182.0 37.5 Forex losses (gains) 0 0 0 0 Net profit (98.1) (6496.6) 110.3 26.7 Non-operating inc./(exp.) (923) (7,144) 0 0 EPS (98.1) (6496.6) 110.3 26.7 Recurring PBT 465 (8,996) 1,102 1,376 Margins (%) Exceptionals/extraordinaries 0 0 0 0 EBITDAX 25.2 20.2 28.6 29.5 Taxes 288 130 150 180 EBITDA 25.2 20.2 28.6 29.5 Profit after tax 178 (9,126) 952 1,196 EBIT 7.0 (7.2) 5.1 6.6 Other after tax income 0 0 0 0 Pre-tax profit 2.0 (46.9) 5.0 5.8 Minority interests 35 7 7 0 Net profit 0.6 (47.6) 4.3 5.1 Preferred dividends 0 0 0 0 Reported net profit 143 (9,133) 944 1,196 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E Analyst adjustments 0 0 0 0 ROE 0.3 (21.7) 2.5 3.1 Net profit (Credit Suisse) 143 (9,133) 944 1,196 ROIC 0.9 (2.1) 1.6 2.3 Asset turnover (x) 0.2 0.2 0.3 0.3 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Interest burden (x) 0.3 6.5 1.0 0.9 Cash & cash equivalents 12,774 9,538 11,324 500 Tax burden (x) 0.4 1.0 0.9 0.9 Current receivables 8,559 6,202 6,903 7,346 Financial leverage (x) 2.0 2.2 2.2 1.8 Inventories 1,328 1,513 1,684 1,792 Credit ratios 12/15A 12/16E 12/17E 12/18E Other current assets 4,740 5,095 5,163 5,206 Current assets 27,401 22,347 25,074 14,844 Net debt/equity (%) 48.2 63.3 57.4 48.9 Net debt/EBITDA (x) 3.86 6.13 3.48 2.74 Property, plant & equip. 60,388 56,419 54,892 53,114 Investments 681 880 1,247 1,614 Interest cover (x) 3.20 n.a. 2.85 2.85 Intangibles 3,864 435 435 435 Other non-current assets 1,190 506 506 0 12MF P/E multiple Total assets 93,525 80,587 82,154 70,007 Accounts payable 8,081 7,677 8,546 9,094 Short-term debt 11,452 11,294 11,294 11,294 Current provisions 111 70 75 90 Other current liabilities 1,415 751 693 738 Current liabilities 21,059 19,792 20,608 21,215 Long-term debt 23,873 21,913 21,913 8,297 Non-current provisions 627 534 525 484 Other non-current liabilities 1,137 963 963 963 Total liabilities 46,696 43,203 44,010 30,960 Shareholders' equity 46,741 37,293 38,048 38,945 Minority interests 87 92 96 101 Total liabilities & equity 93,525 80,587 82,154 70,007 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 1,624 (1,379) 1,131 1,555 12MF P/B multiple Net interest (595) (862) (396) (546) Tax paid (581) (265) (154) (206) Working capital 2,964 1,250 (130) (1) Other cash & non-cash items 4,213 5,242 5,154 5,406 Operating cash flow 7,624 3,987 5,605 6,208 Capex (8,621) (1,273) (3,628) (3,628) Free cash flow to the firm (997) 2,714 1,977 2,580 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 319 6 0 0 Investing cash flow (8,302) (1,267) (3,628) (3,628) Equity raised 0 0 0 5 Dividends paid (324) (135) (189) (299) Net borrowings 0 0 0 0 Source: Credit Suisse, Thomson Reuters Other financing cash flow (35) (7) (7) 0 Financing cash flow (359) (142) (196) (294) Total cash flow (1,037) 2,577 1,781 2,286 Adjustments 0 0 0 0 Net change in cash (1,037) 2,577 1,781 2,286

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 46 12 January 2017

Asia Pacific/China Oil & Gas Refining & Marketing

Sinopec Shanghai Petrochemical (0338.HK /

338 HK) Rating OUTPERFORM Price (10-Jan-17, HK$) 4.43 INCREASE TARGET PRICE Target price (HK$) (from 4.80) 5.50 Upside/downside (%) 24.2

Mkt cap (HK$/US$ mn) 71,081 / 9,166 Benefitting from a prolonged chemical upcycle Enterprise value (Rmb mn) 58,506 Number of shares (mn) 10,800 ■ Sweet spot in the space. 2016 was the best year for Sinopec SPC, as oil Free float (%) 47.7 prices deep-dived to below US$30/bbl and climbed back to around US$50 in 52-wk price range (HK$) 4.43-2.86 ADTO-6M (US$ mn) 6.0 the first two quarters. In addition, refining margins recorded a historical high Target price is for 12 months. at US$6.9/bbl in 1H16, underpinned by both the domestic pricing mechanism

and inventory gain. The share price increased by 30% YTD, making it one of Research Analysts

the best performing stocks in the sector. Horace Tse 852 2101 7379 ■ Positive outlook even without help from one-off factors. Looking forward, [email protected] we expect refining margins to be broadly stable in 2017-18 with only a slight Jessie Xu margin squeeze from crude price recovery, supported by (1) the standalone 852 2101 7650 [email protected] nature of China's refining market, (2) limited refinery additions in the next two years, and (3) growing demand in China and APAC. ■ More upside in dividends. Sinopec SPC has a healthy balance sheet with Rmb4.5 bn cash on hand and a 16% net cash/equity ratio as at end of June 2016. The company implicitly guided a 30-40% dividend payout ratio and paid out 33% on average in history. 2017E dividend yield could reach 3-4% assuming 33% payout ratio, with more upside. ■ New TP HK$5.0 (from HK$4.8); maintain OUTPERFORM. We fine-tune our 2016-18 earnings forecasts by -1%/8%/2% for being cautious on the refining margin assumption of 2H16 when oil prices are range-bound. Our new TP of HK$5.5 (from HK$4.8) continues to be based on DCF methodology. We believe Sinopec SPC is a safe play with a high dividend yield, which is rare in the sector. Maintain our OUTPERFORM rating.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 67,037.2 55,792.2 69,100.2 76,693.9 EBITDA (Rmb mn) 5,940.3 8,177.7 7,017.2 6,288.6 EBIT (Rmb mn) 3,908.9 6,183.0 5,154.2 4,478.4 Net profit (Rmb mn) 3,274.3 5,114.7 4,403.7 3,951.9 EPS (CS adj.) (Rmb) 0.30 0.47 0.41 0.37 Change from previous EPS (%) n.a. (0.8) 7.8 1.8 Consensus EPS (Rmb) n.a. 0.45 0.39 0.37 EPS growth (%) n.m. 56.2 (13.9) (10.3) The price relative chart measures performance against the P/E (x) 13.0 8.3 9.7 10.8 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 2.5 4.0 3.4 3.1 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 10.8 7.2 8.1 8.6

Performance 1M 3M 12M P/B (x) 2.16 1.71 1.46 1.28 Absolute (%) 6.7 12.2 41.5 ROE (%) 18.0 22.9 16.2 12.6 Relative (%) 6.4 16.2 26.1 Net debt/equity (%) 4.9 Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 47 12 January 2017

Sinopec Shanghai Petrochemical (0338.HK / 338 HK) Price (10 Jan 2017): HK$4.43; Rating: OUTPERFORM; Target Price: (from HK$4.80) HK$5.50; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Brent price (US/bbl) 98.94 44.53 56.25 67.50 Shares (wtd avg.) (mn) 10,800 10,800 10,800 10,800 FX (USD/RMB) 6.16 6.65 6.97 7.11 EPS (Credit Suisse) 0.30 0.47 0.41 0.37 - - - - (Rmb)DPS (Rmb) 0.10 0.16 0.13 0.12 - - - - BVPS (Rmb) 1.83 2.31 2.71 3.08 - - - - Operating CFPS (Rmb) 0.46 0.64 0.59 0.47 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 67,037 55,792 69,100 76,694 P/E 13.0 8.3 9.7 10.8 Cost of goods sold 62,757 49,283 63,444 71,569 P/B 2.16 1.71 1.46 1.28 SG & A 601 446 622 767 Dividend yield (%) 2.5 4.0 3.4 3.1 Other operating exp./(inc.) (2,261) (2,115) (1,983) (1,930) P/CF 8.7 6.1 6.7 8.5 EBITDA 5,940 8,178 7,017 6,289 EV/sales 1.0 1.0 0.8 0.7 Depreciation & amortisation 2,031 1,995 1,863 1,810 EV/EBITDA 10.8 7.2 8.1 8.6 EBIT 3,909 6,183 5,154 4,478 EV/EBIT 16.5 9.5 11.1 12.1 Net interest expense/(inc.) 244 (7) (135) (207) Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 0 0 0 0 Growth (%) Associates/JV 572 650 600 600 Sales revenue (27.7) (16.8) 23.9 11.0 Recurring PBT 4,237 6,840 5,889 5,285 EBIT 764.9 58.2 (16.6) (13.1) Exceptionals/extraordinaries 0 0 0 0 Net profit 573.0 56.2 (13.9) (10.3) Taxes 927 1,710 1,472 1,321 EPS 573.0 56.2 (13.9) (10.3) Profit after tax 3,310 5,130 4,417 3,964 Margins (%) Other after tax income 0 0 0 0 EBITDA 8.9 14.7 10.2 8.2 Minority interests 36 15 13 12 EBIT 5.8 11.1 7.5 5.8 Preferred dividends 0 0 0 0 Pre-tax profit 6.3 12.3 8.5 6.9 Reported net profit 3,274 5,115 4,404 3,952 Net profit 4.9 9.2 6.4 5.2 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 3,274 5,115 4,404 3,952 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 18.0 22.9 16.2 12.6 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 14.1 23.0 19.4 16.5 Cash & cash equivalents 1,077 5,861 6,396 9,173 Asset turnover (x) 2.4 1.7 2.2 2.2 Current receivables 489 841 684 799 Interest burden (x) 1.1 1.1 1.1 1.2 Inventories 4,178 3,837 3,552 4,069 Tax burden (x) 0.8 0.8 0.7 0.8 Other current assets 2,400 2,400 2,404 2,446 Financial leverage (x) 1.4 1.3 1.2 1.2 Current assets 8,144 12,939 13,036 16,486 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 15,106 14,585 13,961 13,403 Investments 3,311 3,311 3,311 3,311 Net debt/equity (%) 4.9 (20.1) (23.8) (31.2) Intangibles 0 0 0 0 Net debt/EBITDA (x) 0.17 (0.59) (0.91) (1.46) Interest cover (x) 16.03 n.a. n.a. n.a. Other non-current assets 1,260 1,286 1,347 1,395 Total assets 27,821 32,121 31,655 34,595 Accounts payable 2,124 1,842 1,699 1,849 12MF P/E multiple Short-term debt 2,070 1,000 0 0 Current provisions 0 0 0 0 Other current liabilities 3,532 5,135 3,083 3,362 Current liabilities 7,726 7,977 4,782 5,211 Long-term debt 0 0 0 0 Non-current provisions 0 0 0 0 Other non-current liabilities 0 0 0 0 Total liabilities 7,726 7,977 4,782 5,211 Shareholders' equity 19,797 24,912 29,316 33,268 Minority interests 297 312 326 338 Total liabilities & equity 27,821 32,121 31,655 34,595 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 3,909 6,183 5,154 4,478 Net interest (166) 7 135 207 Tax paid (927) (1,710) (1,472) (1,321) 12MF P/B multiple Working capital 379 (294) 299 (481) Other cash & non-cash items 1,738 2,762 2,211 2,150 Operating cash flow 4,933 6,949 6,327 5,033 Capex (800) (1,500) (1,300) (1,300) Free cash flow to the firm 4,133 5,449 5,027 3,733 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 34 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 327 92 163 207 Investing cash flow (439) (1,408) (1,137) (1,093) Equity raised 0 0 0 0 Dividends paid (11) (1,080) (1,688) (1,453) Net borrowings (3,641) (1,070) (1,000) 0 Other financing cash flow (44) 1,393 (1,967) 290 Financing cash flow (3,696) (757) (4,654) (1,163) Source: Credit Suisse, Thomson Reuters Total cash flow 798 4,784 535 2,777 Adjustments 0 0 0 0 Net change in cash 798 4,784 535 2,777

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 48 12 January 2017

Asia Pacific/China Trading Companies & Distributors

Sinopec Kantons (0934.HK / 934 HK) Rating OUTPERFORM Price (10-Jan-17, HK$) 3.53 INCREASE TARGET PRICE Target price (HK$) (from 5.00) 5.10 Upside/downside (%) 44.5

Mkt cap (HK$/US$ mn) 8,776 / 1,132 Riding on rising crude imports Enterprise value (HK$ mn) 14,201 Number of shares (mn) 2,486 ■ Beneficiary of rising crude imports. Sinopec Kantons is the logistics arm Free float (%) 39.7 of Sinopec which handles 80%/55% of Sinopec/China's total crude oil import 52-wk price range (HK$) 4.25-3.42 ADTO-6M (US$ mn) 1.5 volumes. We expect oil imports to China to continue to grow as the supply Target price is for 12 months. gap from declining domestic oil production will have to be met through oil Research Analysts imports. Sinope Kantons could be the biggest beneficiary to ride on this Horace Tse trend. We expect oil jetty throughput to grow at 10%/5% in 2017/18. 852 2101 7379 [email protected] ■ Yu-Ji pipeline is set to recover. The Yu-Ji pipeline was weaker than market Jessie Xu expectations in 1H16 from both transmission volume and tariff perspectives, 852 2101 7650 [email protected] likely on sluggish demand in Shandong, which was flooded with LNG imports from PNG. We forecast that transmission volumes will increase 14% YoY

based on the improvements in supply-demand fundamentals: (1) more heating demand in the winter season; and (2) APLNG could supply LNG to other provinces other than Shandong only (the case for PNGLNG) might help ease the oversupply situation in Shandong. ■ Severely undervalued. The stock has been trading at around 9x P/E, 1 SD below its five-year average since it derated in mid-2015. Now that the likelihood of extending the vessel charter business after 2016 is very small, and the stagnation of the Batam project is within expectation, we believe the negatives are already priced in. With a clear earnings outlook supported by oil jetties and pipeline, any progress could surprise the market on the upside and trigger a rerating on the stock, in our view. ■ New TP of HK$5.1; maintain OUTPERFORM. We raise our 2016-18 earnings forecasts by 8-16% on higher jetty utilisation rate forecasts and roll over our valuation base to 2017. Our new target price of HK$5.1 (from HK$5.0) is based on 9.5x 2017P/E (from 12.5x), in line with its historical average after derating since mid-2015. Maintain OUTPERFORM. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (HK$ mn) 2,043.6 1,757.3 1,846.9 2,064.9 EBITDA (HK$ mn) 1,280.9 1,121.7 1,304.9 1,497.0 EBIT (HK$ mn) 730.4 586.0 755.6 851.3 Net profit (HK$ mn) 1,026.9 1,075.4 1,340.4 1,543.2 EPS (CS adj.) (HK$) 0.41 0.43 0.54 0.62 Change from previous EPS (%) n.a. 7.5 13.8 15.9 Consensus EPS (HK$) n.a. 0.42 0.48 0.57 EPS growth (%) 0.8 4.7 24.6 15.1 P/E (x) 8.5 8.2 6.5 5.7 The price relative chart measures performance against the Dividend yield (%) 1.4 2.1 2.6 3.0 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. On EV/EBITDA (x) 9.1 12.7 10.7 10.6 10/01/17 the spot exchange rate was HK$7.75/US$1 P/B (x) 0.94 0.85 0.77 0.69 Performance 1M 3M 12M ROE (%) 9.4 11.0 12.4 12.8 Absolute (%) -0.6 -5.9 -16.9 Net debt/equity (%) 30.6 52.7 44.9 55.6 Relative (%) -3.1 -4.1 -34.7 Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 49 12 January 2017

Sinopec Kantons (0934.HK / 934 HK) Price (10 Jan 2017): HK$3.53; Rating: OUTPERFORM; Target Price: (from HK$5.00) HK$5.10; Analyst: Horace Tse Income Statement (HK$ mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 2,044 1,757 1,847 2,065 Sinopec Kantons is a logistics and trading company. Its principal Cost of goods sold 654 540 439 446 activities are operating crude oil loading, storage and transmission EBITDA 1,281 1,122 1,305 1,497 facilities in China and trading of petroleum and petroleum products. EBIT 730 586 756 851 Net interest expense/(inc.) 183 232 293 290 Blue/Grey Sky Scenario Recurring PBT 1,219 1,265 1,577 1,816 Profit after tax 1,027 1,075 1,340 1,543 Reported net profit 1,027 1,075 1,340 1,543 Net profit (Credit Suisse) 1,027 1,075 1,340 1,543 Balance Sheet (HK$ mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 1,058 782 3,095 1,155 Current receivables 988 1,059 1,113 1,245 Inventories 21 19 17 19 Other current assets 0 0 (0) 0 Current assets 2,067 1,860 4,225 2,419 Property, plant & equip. 7,576 7,359 7,130 9,411 Investments 7,057 7,837 8,700 9,634 Intangibles 0 0 0 0 Other non-current assets 914 914 914 914 Total assets 17,614 17,970 20,970 22,378 Current liabilities 4,163 3,630 3,518 3,645 Total liabilities 8,202 7,665 9,552 9,680 Shareholders' equity 9,373 10,266 11,379 12,659 Minority interests 39 39 39 39 Total liabilities & equity 17,614 17,970 20,970 22,378 Cash Flow (HK$ mn) 12/15A 12/16E 12/17E 12/18E EBIT 730 586 756 851 Net interest 0 0 0 0 Tax paid (174) (190) (237) (272) Working capital 364 (2,878) (165) (6) Our Blue Sky Scenario (HK$) 6.10 Other cash & non-cash items 553 492 504 636 We get our blue sky scenario target price by assuming (1) higher- Operating cash flow 1,474 (1,990) 858 1,210 than-expected oil jetty utilisation to support over 10% YoY% Capex (322) (275) (275) (2,918) throughput growth, (2) Yu-Ji pipeline recover in both transmission Free cash flow to the firm 1,152 (2,265) 583 (1,708) volume and tariff. Investing cash flow (378) (127) 11 (2,558) Equity raised 0 0 0 0 Our Grey Sky Scenario (HK$) 4.10 Dividends paid (353) (183) (228) (262) We get our grey sky scenario target price by assuming slower crude Financing cash flow (551) 1,846 1,443 (591) oil imports to China and weaker-than-expected Yu-Ji pipeline Total cash flow 545 (271) 2,313 (1,940) recovery due to lukewarm gas demand in Shandong Province. Adjustments 0 0 0 0 Net change in cash 545 (271) 2,313 (1,940) Share price performance Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 2,486 2,486 2,486 2,486 EPS (Credit Suisse) (HK$) 0.41 0.43 0.54 0.62 DPS (HK$) 0.05 0.07 0.09 0.11 Operating CFPS (HK$) 0.59 (0.80) 0.35 0.49 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (90.1) (14.0) 5.1 11.8 EBIT (10.2) (19.8) 28.9 12.7 EPS 0.8 4.7 24.6 15.1 Margins (%) EBITDA 62.7 63.8 70.7 72.5 EBIT 35.7 33.3 40.9 41.2 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 8.5 8.2 6.5 5.7 The price relative chart measures performance against the MSCI CHINA F IDX P/B 0.94 0.85 0.77 0.69 which closed at 6,226.42 on 10-Jan-2017 Dividend yield (%) 1.4 2.1 2.6 3.0 On 10-Jan-2017 the spot exchange rate was HK$7.75/US$1 EV/sales 5.7 8.1 7.5 7.7 EV/EBITDA 9.1 12.7 10.7 10.6 EV/EBIT 16.0 24.2 18.4 18.6 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 9.4 11.0 12.4 12.8 ROIC 4.4 3.6 4.0 4.0 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 30.6 52.7 44.9 55.6 Net debt/EBITDA (x) 2.25 4.84 3.92 4.72

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 50 12 January 2017

Asia Pacific/China Natural Gas

Kunlun Energy (0135.HK / 135 HK) Rating UNDERPERFORM Price (09-Jan-17, HK$) 5.98 INCREASE TARGET PRICE Target price (12-mth, HK$) (from 4.80) 4.90 Upside/downside (%) -18.1

Mkt cap (HK$/US$ mn) 48,273 / 6,224 Headwinds loom Enterprise value (HK$ mn) 84,054 Number of shares (mn) 8,072 ■ Exposure to tariff cuts. The NDRC issued a new policy on the pricing Free float (%) 37.5 regulation of gas transmission tariffs in August 2016, targeting an 8% ROA and 52-wk price range (HK$) 7.05-5.16 ADTO-6M (US$ mn) 8.9 assuming a pipeline utilisation of no less than 75%. Kunlun Energy, which *Stock ratings are relative to the relevant country benchmark. owns 60% of the Shanxi-Beijing pipeline, should see earnings downside since ¹Target price is for 12 months. the ROA of the project should be low-teens by our estimates. Our assessment

Research Analysts suggests that a 10% tariff cut would lead to a 10% earnings drop in 2017.

Horace Tse ■ Gas demand remains tepid. We expect gas demand to be lukewarm in 852 2101 7379 [email protected] 2017, following the depressed single-digit growth in 2016. To boost gas 3 Dave Dai, CFA consumption in the long run, we expect a Rmb0.3/m city-gate price cut 852 2101 7358 nationwide in 2017 (CS base case assumption). We now forecast total gas [email protected] distribution volumes (including Kunlun Gas) will increase 7%/5% in 2017/18E, Jessie Xu after accounting for the Rmb0.3/m3 city-gate price cut in 2017. 852 2101 7650 [email protected] ■ Potential upside. We think Kunlun is on the right track to re-focus on its mid- stream business and become a pure natural gas platform within CNPC. There is a possibility that the company could dispose of all its E&P assets to its parentco, which should remove losses from Kunlun and hence benefit profitability. ■ Maintain UNDERPERFORM rating. We now forecast a 10% tariff cut in 2H17, and our 2017/18 earnings forecasts are lowered by 9%/13% as a result. We keep our target multiples unchanged while rolling over the valuation base to 2017. Our SOTP-based TP is lifted to HK$4.9 (from HK$4.8), implying 10x 2017E P/E, in line with city-gate gas players. The stock is now trading at 12x 2017E P/E, at a premium to other city-gas distributors, which we believe is not justified. Maintain UNDERPERFORM.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (HK$ mn) 41,641.0 80,068.6 85,150.3 89,794.6 EBITDA (HK$ mn) 14,172.0 17,457.9 16,409.0 18,500.5 EBIT (HK$ mn) 7,167.0 10,830.5 9,606.9 11,652.5 Net profit (HK$ mn) 137.0 4,812.8 4,256.5 5,437.1 EPS (CS adj.) (HK$) 0.02 0.56 0.49 0.63 Change from previous EPS (%) n.a. 4.3 (9.3) (12.5) Consensus EPS (HK$) n.a. 0.57 0.57 0.62 EPS growth (%) (97.6) 3190.9 (11.6) 27.7 The price relative chart measures performance against the P/E (x) 352.3 10.7 12.1 9.5 MSCI CHINA F IDX which closed at 6,175.82 on 09/01/17. Dividend yield (%) 1.0 2.8 2.5 3.2 On 09/01/17 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 4.2 4.8 4.9 4.0

Performance 1M 3M 12M P/B (x) 0.98 0.96 0.91 0.85 Absolute (%) 2.4 -2.6 -6.6 ROE (%) 0.3 9.4 7.8 9.3 Relative (%) 2.9 3.5 -17.2 Net debt/equity (%) 16.5 48.1 40.7 31.4

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 51 12 January 2017

Kunlun Energy (0135.HK / 135 HK) Price (09 Jan 2017): HK$5.98; Rating: UNDERPERFORM; Target Price: (from HK$4.80) HK$4.90; Analyst: Horace Tse Income Statement (HK$ mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 41,641 80,069 85,150 89,795 Kunlun Energy, through its subsidiaries, is involved in E&P (mainly Cost of goods sold 22,884 52,801 57,920 60,046 China, Kazakhstan, Oman), LNG terminals, processing factories, EBITDA 14,172 17,458 16,409 18,500 gas pipeline and natural gas distribution (city-gate & LNG EBIT 7,167 10,830 9,607 11,652 transportation). Net interest expense/(inc.) 1,112 1,568 2,009 1,829 Recurring PBT 4,927 10,223 8,626 10,222 Blue/Grey Sky Scenario Profit after tax 2,320 7,667 6,469 7,666 Reported net profit 137 4,813 4,256 5,437 Net profit (Credit Suisse) 137 4,813 4,256 5,437 Balance Sheet (HK$ mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 11,771 13,205 17,492 18,405 Current receivables 5,769 7,464 7,688 7,893 Inventories 916 1,761 1,873 1,975 Other current assets 0 0 0 0 Current assets 18,456 22,431 27,053 28,274 Property, plant & equip. 80,390 105,133 104,507 102,982 Investments 4,399 4,399 4,399 4,399 Intangibles 503 503 503 503 Other non-current assets 4,333 4,333 4,333 4,333 Total assets 108,081 136,798 140,795 140,490 Current liabilities 20,238 32,320 33,414 33,869 Total liabilities 37,757 62,145 63,239 58,694 Shareholders' equity 49,123 53,452 56,355 60,596 Minority interests 21,201 21,201 21,201 21,201 Total liabilities & equity 108,081 136,798 140,795 140,490 Cash Flow (HK$ mn) 12/15A 12/16E 12/17E 12/18E EBIT 7,167 10,830 9,607 11,652 Net interest 0 0 0 0 Tax paid (3,463) (2,556) (2,156) (2,555) Working capital 1,500 (2,737) 758 147 Other cash & non-cash items 7,764 6,627 6,802 6,848 Our Blue Sky Scenario (HK$) 5.88 Operating cash flow 12,968 12,165 15,010 16,092 We get our blue sky scenario target price by assuming (1) higher oil Capex (5,917) (32,430) (6,177) (5,322) price than CS base case forecast (US$56/bbl in 2017), (2) double Free cash flow to the firm 7,051 (20,265) 8,834 10,770 digit gas sales growth, and (3) less than 5% tariff cut for S-J Investing cash flow (5,035) (31,917) (5,538) (4,501) pipeline. Equity raised 0 0 0 0 Dividends paid (1,614) (484) (1,353) (1,197) Our Grey Sky Scenario (HK$) 3.92 Financing cash flow (6,801) 20,126 (5,185) (10,678) We get our grey sky scenario target price by assuming (1) lower oil Total cash flow 1,132 374 4,287 913 price than CS base case forecast (US$56/bbl in 2017), (2) low Adjustments 0 0 0 0 single-digit gas sales growth, and (3) 20% tariff cut for S-J pipeline. Net change in cash 1,132 374 4,287 913 Per share 12/15A 12/16E 12/17E 12/18E Share price performance Shares (wtd avg.) (mn) 8,072 8,617 8,617 8,617 EPS (Credit Suisse) (HK$) 0.02 0.56 0.49 0.63 DPS (HK$) 0.06 0.17 0.15 0.19 Operating CFPS (HK$) 1.61 1.41 1.74 1.87 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (13.3) 92.3 6.3 5.5 EBIT (36.3) 51.1 (11.3) 21.3 EPS (97.6) 3190.9 (11.6) 27.7 Margins (%) EBITDA 34.0 21.8 19.3 20.6 EBIT 17.2 13.5 11.3 13.0 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 352.3 10.7 12.1 9.5 P/B 0.98 0.96 0.91 0.85 The price relative chart measures performance against the MSCI CHINA F IDX Dividend yield (%) 1.0 2.8 2.5 3.2 which closed at 6,175.82 on 09-Jan-2017 EV/sales 1.4 1.1 0.9 0.8 On 09-Jan-2017 the spot exchange rate was HK$7.76/US$1 EV/EBITDA 4.2 4.8 4.9 4.0 EV/EBIT 8.4 7.8 8.3 6.3 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 0.3 9.4 7.8 9.3 ROIC 4.0 8.4 6.6 8.1 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) 16.5 48.1 40.7 31.4 Net debt/EBITDA (x) 0.82 2.06 1.93 1.39

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 52 12 January 2017

Asia Pacific/China Engineering & Construction

Sinopec Engineering (2386.HK / 2386 HK) Rating UNDERPERFORM Price (10-Jan-17, HK$) 6.33 FORECAST CHANGE Target price (HK$) 5.30 Upside/downside (%) -16.3

Mkt cap (HK$/US$ mn) 28,029 / 3,615 In transition Enterprise value (Rmb mn) 14,928 Number of shares (mn) 4,428 ■ Double-whammy on CTO. 2016 has been an extremely challenging year for Free float (%) 30.0 Sinopec Engineering's CTO projects as oil prices stayed depressed and coal 52-wk price range (HK$) 7.38-5.62 ADTO-6M (US$ mn) 2.4 prices more than doubled across the year. 55% of the CTO backlog (Rmb12 Target price is for 12 months. bn, Damei & Zhong'an) is continuously suspended without any clear signs of

resuming in 2017. With coal price likely staying higher for longer (CS Research Analysts

forecasts QHD5500 spot price will average Rmb510/ton in 2017), we do not Horace Tse see any motivation for CTO project owners to push forward against this 852 2101 7379 [email protected] backdrop. Jessie Xu ■ Eyes on 2017 new-wins. We revise down our 2016 new contract estimates 852 2101 7650 [email protected] from Rmb35 bn to Rmb30 bn without mega-size contracts being signed in 4Q16. As the Zhongke refinery is expected to be signed in 2017 and start construction soon (total contract value is expected to be around Rmb20 bn) and Gulei refinery in the pipeline, we revise up our 2017/18 new contract forecasts to Rmb35 bn/Rmb36 bn from Rmb34 bn/Rmb35 bn. ■ Margin pressure to sustain. Without signs of any improvement in the competitive landscape of the whole industry and any policy support, we stay bearish on the margin outlook for Sinopec Engineering. We expect gross margin of the company to be depressed at c.12% in the next three years. ■ Maintain HK$5.3 TP and Underperform rating. Although 2016 seems to be a bottom, we do not see any strong evidence or catalyst to call it a reflection yet, since coal prices are likely to stay high, on top of a halt in new refining project approvals in the first two years of the 13th Five-Year Plan. We apply 0.8x 2017 P/B target multiple and RMB/USD forecast of 7.33. As a result, our target price of HK$5.3 remains unchanged while our 2016-18E EPS falls 1- 2%. Maintain an UNDERPERFORM rating.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 45,498.4 38,735.1 37,356.6 36,053.7 EBITDA (Rmb mn) 4,464.5 3,031.2 3,422.1 3,324.8 EBIT (Rmb mn) 3,845.2 2,384.5 2,749.5 2,626.3 Net profit (Rmb mn) 3,317.8 2,294.8 2,566.4 2,482.0 EPS (CS adj.) (Rmb) 0.75 0.52 0.58 0.56 Change from previous EPS (%) n.a. (0.9) (0.9) (2.1) Consensus EPS (Rmb) n.a. 0.54 0.58 0.61 EPS growth (%) (4.9) (30.8) 11.8 (3.3) The price relative chart measures performance against the P/E (x) 7.5 10.9 9.7 10.1 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 5.3 3.6 4.1 3.9 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 3.0 4.9 4.1 3.6

Performance 1M 3M 12M P/B (x) 1.02 0.98 0.92 0.87 Absolute (%) -3.4 -6.1 5.5 ROE (%) 14.0 9.1 9.7 8.9 Relative (%) -5.9 -4.4 -12.3 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 53 12 January 2017

Sinopec Engineering (2386.HK / 2386 HK) Price (10 Jan 2017): HK$6.33; Rating: UNDERPERFORM; Target Price: HK$5.30; Analyst: Horace Tse Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 45,498 38,735 37,357 36,054 Sinopec Engineering (SEG) is a leading oil refining, petrochemical Cost of goods sold 39,341 34,198 32,865 31,672 and new coal chemical engineering company in China. SEG has EBITDA 4,464 3,031 3,422 3,325 four business segments: Engineering, consulting & licensing, EPC EBIT 3,845 2,384 2,750 2,626 Contracting, Construction, and Equipment manufacturing. Net interest expense/(inc.) (375) (514) (507) (522) Recurring PBT 4,240 2,921 3,280 3,172 Blue/Grey Sky Scenario Profit after tax 3,318 2,295 2,566 2,482 Reported net profit 3,318 2,295 2,566 2,482 Net profit (Credit Suisse) 3,318 2,295 2,566 2,482 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 11,406 10,054 10,867 13,103 Current receivables 24,350 17,965 17,237 16,142 Inventories 1,830 1,360 1,705 1,248 Other current assets 12,880 13,877 13,877 13,876 Current assets 50,465 43,256 43,686 44,370 Property, plant & equip. 4,014 3,932 3,823 3,687 Investments 136 158 180 203 Intangibles 3,068 2,945 2,824 2,704 Other non-current assets 722 722 722 722 Total assets 58,404 51,012 51,235 51,686 Current liabilities 30,799 22,468 21,018 20,004 Total liabilities 33,766 25,436 23,985 22,971 Shareholders' equity 24,635 25,573 27,246 28,711 Minority interests 4 4 4 4 Total liabilities & equity 58,404 51,012 51,235 51,686 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 3,845 2,384 2,750 2,626 Net interest 84 116 91 106 Tax paid (916) (626) (713) (690) Working capital 2,132 (1,473) (1,067) 539 Other cash & non-cash items 677 647 673 699 Our Blue Sky Scenario (HK$) 6.36 Operating cash flow 5,822 1,047 1,733 3,280 Our blue sky scenario is derived from assuming double digit growth Capex (262) (443) (443) (443) of new order value in 2017-18 and gross margin recovery to high- Free cash flow to the firm 5,561 605 1,290 2,837 teens. Investing cash flow (2,602) (1,044) (26) (26) Equity raised 0 0 0 0 Our Grey Sky Scenario (HK$) 4.24 Dividends paid (1,333) (1,315) (893) (1,017) Our grey sky scenario is derived from flattish revenue in the next two Financing cash flow (1,335) (1,315) (893) (1,017) years and gross margin deterioration on fierce competition in both Total cash flow 1,886 (1,311) 814 2,236 China and overseas markets. Adjustments 367 1 0 0 Net change in cash 2,253 (1,310) 814 2,236 Share price performance Per share 12/15A 12/16E 12/17E 12/18E Shares (wtd avg.) (mn) 4,428 4,428 4,428 4,428 EPS (Credit Suisse) (Rmb) 0.75 0.52 0.58 0.56 DPS (Rmb) 0.30 0.20 0.23 0.22 Operating CFPS (Rmb) 1.31 0.24 0.39 0.74 Earnings 12/15A 12/16E 12/17E 12/18E Growth (%) Sales revenue (7.8) (14.9) (3.6) (3.5) EBIT (4.8) (38.0) 15.3 (4.5) EPS (4.9) (30.8) 11.8 (3.3) Margins (%) EBITDA 9.8 7.8 9.2 9.2 EBIT 8.5 6.2 7.4 7.3 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 7.5 10.9 9.7 10.1 The price relative chart measures performance against the MSCI CHINA F IDX P/B 1.02 0.98 0.92 0.87 which closed at 6,226.42 on 10-Jan-2017 Dividend yield (%) 5.3 3.6 4.1 3.9 On 10-Jan-2017 the spot exchange rate was HK$7.75/US$1 EV/sales 0.3 0.4 0.4 0.3 EV/EBITDA 3.0 4.9 4.1 3.6 EV/EBIT 3.5 6.3 5.1 4.5 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 14.0 9.1 9.7 8.9 ROIC 22.4 13.0 13.5 12.8 Credit ratios 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) (46.3) (39.3) (39.9) (45.6) Net debt/EBITDA (x) (2.55) (3.32) (3.18) (3.94)

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 54 12 January 2017

Asia Pacific/China Oil & Gas Equipment & Services

Sinopec SSC (1033.HK / 1033 HK) Rating UNDERPERFORM [V] Price (10-Jan-17, HK$) 1.51 COMPANY UPDATE Target price (HK$) 1.00 Upside/downside (%) -33.8

Mkt cap (HK$/US$ mn) 60,000 / 7,738 Not enough to turn around Enterprise value (Rmb mn) 74,009 Number of shares (mn) 14,143 ■ A victim of depressed oil price. Sinopec SSC reported a widened net loss Free float (%) 8.5 in the first three quarters of 2016, although oil prices have stayed largely 52-wk price range (HK$) 1.86-1.40 ADTO-6M (US$ mn) 2.5 flattish from around the 2Q to date. This could partially be explained by the Target price is for 12 months. upstream capex squeeze from Sinopec, which greatly slashed its E&P capex [V] = Stock Considered Volatile (see Disclosure Appendix) budget by 12% to weather the downturn and will probably underspend in

Research Analysts FY16.

Horace Tse ■ Capex recovery to boost revenue growth. The domestic oil production 852 2101 7379 [email protected] decline has been accelerating YTD (from -5% in 2015 to -16% in 3Q16), and Jessie Xu is only the beginning of the multi-year trend. We believe oil companies will 852 2101 7650 have to increase capex to bring domestic production back. As oil prices may [email protected] end the year at a higher level, it will make oil companies easier to make their capex budgets for 2017. We assume Sinopec's E&P capex would increase 25%/5% YoY in 2017/18E, which will likely support Sinopec SSC's revenue growth of 37%/15% in 2017/18E. ■ However, gross margin pressure persists. In the early stage of recovery, volume tends to be the first growth driver, in our view. Meanwhile, we are concerned that the gross margin of the company could remain under pressure in the short to medium term. We forecast gross margins to return to 6%/7% in 2017/18E. That said, the possibility of breaking even in the next two years remains low in our view. ■ Valuation looks stretched; maintain HK$1.0 TP and UNDERPERFORM rating. The company is trading at around 1.7x 2017E P/B, higher than its domestic peers, COSL (0.8x) and Hilong (1.0x). We think the valuation is stretched and unjustified. We roll over our valuation base to 2017 and apply 1.0x target P/B. Our target price of HK$1.0 and UNDERPERFORM rating remain unchanged. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 60,349.3 43,023.6 59,171.1 82,721.1 EBITDA (Rmb mn) 4,678.6 (5,005.4) 3,744.9 5,335.1 EBIT (Rmb mn) 756.1 (9,176.8) (622.0) 772.8 Net profit (Rmb mn) (11.5) (10,154.1) (2,026.0) (660.7) EPS (CS adj.) (Rmb) (0.00) (0.72) (0.14) (0.05) Change from previous EPS (%) n.a. - n.m. n.m. Consensus EPS (Rmb) n.a. (0.36) (0.07) 0.01 EPS growth (%) n.m. n.m. n.m. n.m. The price relative chart measures performance against the P/E (x) (1624.6) (1.9) (9.4) (28.8) MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 0.0 0.0 0.0 0.0 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 13.8 (14.8) 20.7 13.8

Performance 1M 3M 12M P/B (x) 0.76 1.32 1.53 1.61 Absolute (%) -3.8 -1.9 -15.1 ROE (%) (0.1) (51.9) (15.0) (5.4) Relative (%) -6.3 -0.2 -32.8 Net debt/equity (%) 44.0 140.6 193.7 171.2

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 55 12 January 2017

Sinopec SSC (1033.HK / 1033 HK) Price (10 Jan 2017): HK$1.51; Rating: UNDERPERFORM [V]; Target Price: HK$1.00; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Gross margin (%) 0.08 -0.12 0.06 0.07 Shares (wtd avg.) (mn) 13,920 14,142 14,142 14,142 Revenue growth (%) -0.24 -0.29 0.38 0.40 EPS (Credit Suisse) (0.00) (0.72) (0.14) (0.05) - - - - (Rmb)DPS (Rmb) 0.00 0.00 0.00 0.00 - - - - BVPS (Rmb) 1.77 1.02 0.88 0.83 - - - - Operating CFPS (Rmb) (0.03) (0.36) 0.04 0.59 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 60,349 43,024 59,171 82,721 P/E (1624.6) (1.9) (9.4) (28.8) Cost of goods sold 55,317 48,228 55,605 76,915 P/B 0.76 1.32 1.53 1.61 SG & A 4,105 3,787 4,203 5,049 Dividend yield (%) 0.0 0.0 0.0 0.0 Other operating exp./(inc.) (3,752) (3,986) (4,382) (4,577) P/CF (41.6) (3.7) 35.5 2.3 EBITDA 4,679 (5,005) 3,745 5,335 EV/sales 1.1 1.7 1.3 0.9 Depreciation & amortisation 3,923 4,171 4,367 4,562 EV/EBITDA 13.8 (14.8) 20.7 13.8 EBIT 756 (9,177) (622) 773 EV/EBIT 85.1 (8.1) (124.9) 95.4 Net interest expense/(inc.) 655 948 1,304 1,413 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 368 191 0 0 Growth (%) Associates/JV 0 0 0 0 Sales revenue (23.6) (28.7) 37.5 39.8 Recurring PBT 470 (9,934) (1,926) (641) EBIT (79.2) (1313.8) 93.2 224.2 Exceptionals/extraordinaries 0 0 0 0 Net profit (100.5) (87867.7 80.0 67.4 Taxes 481 220 100 20 EPS (100.5) (86485.5) 80.0 67.4 Profit after tax (12) (10,154) (2,026) (661) Margins (%) ) Other after tax income 0 0 0 0 EBITDA 7.8 (11.6) 6.3 6.4 Minority interests (0) 0 0 0 EBIT 1.3 (21.3) (1.1) 0.9 Preferred dividends 0 0 0 0 Pre-tax profit 0.8 (23.1) (3.3) (0.8) Reported net profit (12) (10,154) (2,026) (661) Net profit (0.0) (23.6) (3.4) (0.8) Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) (12) (10,154) (2,026) (661) ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE (0.1) (51.9) (15.0) (5.4) Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC (0.1) (26.7) (1.8) 2.3 Cash & cash equivalents 1,993 1,461 1,693 5,633 Asset turnover (x) 0.7 0.6 0.7 0.8 Current receivables 31,407 22,390 30,794 43,050 Interest burden (x) 0.6 1.1 3.1 (0.8) Inventories 1,979 1,979 1,979 1,979 Tax burden (x) (0.0) 1.0 1.1 1.0 Other current assets 12,809 14,018 14,018 14,018 Financial leverage (x) 3.5 5.3 6.7 8.3 Current assets 48,188 39,848 48,484 64,680 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 31,718 31,011 29,644 28,082 Investments 4,991 4,991 4,991 4,991 Net debt/equity (%) 44.0 140.6 193.7 171.2 Intangibles 77 77 77 77 Net debt/EBITDA (x) 2.32 n.a. 6.44 3.79 Interest cover (x) 1.15 n.a. n.a. 0.55 Other non-current assets 333 333 333 333 Total assets 85,308 76,261 83,530 98,164 Accounts payable 30,194 26,324 30,351 41,983 12MF P/E multiple Short-term debt 12,158 21,158 25,158 25,158 Current provisions 0 0 0 0 Other current liabilities 17,558 13,535 14,803 18,466 Current liabilities 59,909 61,017 70,312 85,606 Long-term debt 670 670 670 670 Non-current provisions 0 0 0 0 Other non-current liabilities 91 91 91 91 Total liabilities 60,671 61,778 71,073 86,368 Shareholders' equity 24,638 14,484 12,458 11,797 Minority interests (1) (1) (1) (1) Total liabilities & equity 85,308 76,261 83,530 98,164 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 756 (9,177) (622) 773 Net interest 0 0 0 0 Tax paid (481) (220) (100) (20) 12MF P/B multiple Working capital (4,840) (85) (3,109) 3,039 Other cash & non-cash items 4,115 4,371 4,367 4,562 Operating cash flow (451) (5,111) 536 8,354 Capex (4,730) (3,000) (3,000) (3,000) Free cash flow to the firm (5,181) (8,111) (2,464) 5,354 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 80 (464) 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 415 17 13 15 Investing cash flow (4,236) (3,447) (2,987) (2,985) Equity raised 6,000 0 0 0 Dividends paid 0 0 0 0 Net borrowings 244 9,000 4,000 0 Other financing cash flow (741) (698) (698) (698) Financing cash flow 5,503 8,302 3,302 (698) Source: Credit Suisse, Thomson Reuters Total cash flow 817 (256) 851 4,670 Adjustments 0 0 0 0 Net change in cash 817 (256) 851 4,670

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 56 12 January 2017

Asia Pacific/China Oil & Gas Equipment & Services

Hilong (1623.HK / 1623 HK) Rating OUTPERFORM [V] Price (10-Jan-17, HK$) 2.09 INCREASE TARGET PRICE Target price (HK$) (from 1.80) 2.50 Upside/downside (%) 19.6

Mkt cap (HK$/US$ mn) 3,546 / 457.23 Best in class Enterprise value (Rmb mn) 5,084 Number of shares (mn) 1,696 ■ More resilient than independent OFS peers. Hilong's niche business model Free float (%) 37.9 makes it more resilient than its peers over a cyclical downturn. Drill Pipes, its 52-wk price range (HK$) 2.53-0.78 ADTO-6M (US$ mn) 0.9 core business segment, which contributes ~40% of the top line, is considered Target price is for 12 months. consumables in nature, as typically a drill pipe would only last for 1.5 years in [V] = Stock Considered Volatile (see Disclosure Appendix) a normal operating environment. In China there were 282,000 oil productive

Research Analysts wells in the domestic onshore market as of 2015, a 6% CAGR increase over

Horace Tse the past five years. 70% of the wells are in the four biggest onshore oilfields 852 2101 7379 (Daqing, Changqing, Shengli, Xinjiang) which account for 50% of China's total [email protected] oil production. Given the deteriorating oil production starting 2016, we expect Jessie Xu a material pick-up in maintenance drilling activities in 2017 to combat the 852 2101 7650 [email protected] decline. ■ Opportunities in Russia market. Hilong has announced a contract award of 17,914 tons drill pipes to Rosneft in Russia in 2017, signalling the continuation of the Russian market and dismissing market concerns that the Russian contracts in 2016 were a one-off. We forecast a 16% YoY increase in drill pipe volumes for 2017 to 33,150 tons, up from 28,500 tons in 2016. ■ Maintain OUTPERFORM, new TP HK$2.5. Our new target price of HK$2.5 (up from HK$1.8) is based on: (1) raising our target multiple to 1.2x P/B (from 0.9x P/B); (2) rolling forward our valuation to 2017 multiple; and (3) incorporating the CS house view RMB/USD forecast of 7.33 in our valuation. We maintain our OUTPERFORM rating.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 2,484.3 2,055.1 2,514.6 2,830.8 EBITDA (Rmb mn) 616.2 627.7 727.0 804.4 EBIT (Rmb mn) 407.8 393.1 463.5 518.3 Net profit (Rmb mn) 144.3 149.2 218.1 260.9 EPS (CS adj.) (Rmb) 0.09 0.09 0.13 0.15 Change from previous EPS (%) n.a. 11.8 3.7 3.0 Consensus EPS (Rmb) n.a. 0.10 0.14 0.17 EPS growth (%) (65.4) 3.4 46.2 19.6 The price relative chart measures performance against the P/E (x) 21.9 21.2 14.5 12.1 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 0.9 0.9 1.4 1.6 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 8.0 8.1 6.5 5.9

Performance 1M 3M 12M P/B (x) 1.05 1.01 0.95 0.89 Absolute (%) -12.8 35.3 75.8 ROE (%) 4.9 4.8 6.7 7.6 Relative (%) -15.4 36.9 58.0 Net debt/equity (%) 54.8 57.0 43.8 42.2

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 57 12 January 2017

Hilong (1623.HK / 1623 HK) Price (10 Jan 2017): HK$2.09; Rating: OUTPERFORM [V]; Target Price: (from HK$1.80) HK$2.50; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Revenue growth (YoY%) -0.04 -0.17 0.22 0.13 Shares (wtd avg.) (mn) 1,696 1,696 1,696 1,696 Operating margin (%) 0.17 0.19 0.18 0.18 EPS (Credit Suisse) 0.09 0.09 0.13 0.15 - - - - (Rmb)DPS (Rmb) 0.02 0.02 0.03 0.03 - - - - BVPS (Rmb) 1.78 1.85 1.96 2.09 - - - - Operating CFPS (Rmb) 0.29 0.05 0.41 0.21 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 2,484 2,055 2,515 2,831 P/E 21.9 21.2 14.5 12.1 Cost of goods sold 1,674 1,336 1,634 1,840 P/B 1.05 1.01 0.95 0.89 SG & A 192 139 81 114 Dividend yield (%) 0.9 0.9 1.4 1.6 Other operating exp./(inc.) 1 (48) 72 72 P/CF 6.5 39.7 4.6 9.1 EBITDA 616 628 727 804 EV/sales 2.0 2.5 1.9 1.7 Depreciation & amortisation 208 235 263 286 EV/EBITDA 8.0 8.1 6.5 5.9 EBIT 408 393 464 518 EV/EBIT 12.1 13.0 10.2 9.2 Net interest expense/(inc.) 230 193 189 189 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) (0) 0 (0) 0 Growth (%) Associates/JV 4 4 5 5 Sales revenue (3.6) (17.3) 22.4 12.6 Recurring PBT 183 204 280 335 EBIT (26.6) (3.6) 17.9 11.8 Exceptionals/extraordinaries 0 0 0 0 Net profit (65.4) 3.5 46.2 19.6 Taxes 25 41 42 50 EPS (65.4) 3.4 46.2 19.6 Profit after tax 157 164 238 284 Margins (%) Other after tax income 0 0 0 0 EBITDA 24.8 30.5 28.9 28.4 Minority interests 13 14 20 23 EBIT 16.4 19.1 18.4 18.3 Preferred dividends 0 0 0 0 Pre-tax profit 7.4 9.9 11.1 11.8 Reported net profit 144 149 218 261 Net profit 5.8 7.3 8.7 9.2 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 144 149 218 261 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 4.9 4.8 6.7 7.6 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 7.0 6.1 7.5 8.3 Cash & cash equivalents - - - - Asset turnover (x) 0.4 0.3 0.4 0.4 Current receivables 1,858 1,971 1,653 1,861 Interest burden (x) 0.4 0.5 0.6 0.6 Inventories 804 788 964 1,086 Tax burden (x) 0.9 0.8 0.8 0.8 Other current assets 926 743 902 857 Financial leverage (x) 2.2 2.1 1.9 1.9 Current assets 3,588 3,502 3,520 3,804 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 3,038 3,003 3,040 3,104 Investments 59 61 63 65 Net debt/equity (%) 54.8 57.0 43.8 42.2 Intangibles 156 161 166 171 Net debt/EBITDA (x) 2.89 3.08 2.17 2.01 Interest cover (x) 1.78 2.04 2.46 2.74 Other non-current assets 223 225 224 222 Total assets 7,064 6,953 7,011 7,365 Accounts payable 1,058 845 896 1,008 12MF P/E multiple Short-term debt 1,592 1,104 1,104 1,104 Current provisions 4 4 4 4 Other current liabilities 1 1 1 1 Current liabilities 2,655 1,953 2,004 2,117 Long-term debt 1,084 1,540 1,340 1,340 Non-current provisions 45 45 45 45 Other non-current liabilities 23 23 23 23 Total liabilities 3,808 3,561 3,412 3,525 Shareholders' equity 3,022 3,143 3,331 3,548 Minority interests 234 248 268 291 Total liabilities & equity 7,064 6,953 7,011 7,365 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 408 393 464 518 Net interest (230) (193) (189) (189) Tax paid (50) (41) (42) (50) 12MF P/B multiple Working capital 140 (315) 192 (217) Other cash & non-cash items 218 235 263 286 Operating cash flow 486 80 689 349 Capex (306) (200) (300) (350) Free cash flow to the firm 180 (120) 389 (1) Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments (3) (2) (2) (2) Associate investments 0 0 0 0 Other investment/(outflows) (76) 1 2 2 Investing cash flow (385) (201) (300) (350) Equity raised 0 0 0 0 Dividends paid (67) (28) (30) (44) Net borrowings 0 0 0 0 Other financing cash flow (4) 0 0 0 Financing cash flow (71) (28) (30) (44) Source: Credit Suisse, Thomson Reuters Total cash flow 30 (149) 358 (45) Adjustments 0 0 0 0 Net change in cash 30 (149) 358 (45)

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 58 12 January 2017

Asia Pacific/China Oil & Gas Equipment & Services

Anton Oil (3337.HK / 3337 HK) Rating (from UNDERPERFORM) NEUTRAL [V] Price (10-Jan-17, HK$) 1.13 UPGRADE RATING Target price (HK$) (from 0.50) 1.10 Upside/downside (%) -2.7

Mkt cap (HK$/US$ mn) 2,755 / 355.25 Revival Enterprise value (Rmb mn) 3,596 Number of shares (mn) 2,438 ■ Biggest near-term overhang removed. In our view, the capital raising Free float (%) 42.0 activities that Anton Oil has conducted have significantly reduced its balance 52-wk price range (HK$) 1.20-0.62 ADTO-6M (US$ mn) 1.9 sheet risk and cash flow issue. Anton Oil has raised Rmb400 mn by selling Target price is for 12 months. 16.7% of its share capital (443 mn shares) through two share placements in [V] = Stock Considered Volatile (see Disclosure Appendix) December 2016—to Trafalgar and Geo-Jade Petroleum (A-share OFS

Research Analysts player). Adding to the Rmb343 mn second tranche of proceeds from the Iraq

Horace Tse business sale, which is expected to be collected in early 2017, this should be 852 2101 7379 sufficient to cover repayment of the Rmb502 mn short-term loan due in 2Q17. [email protected]

Jessie Xu ■ New strategic cooperation to explore prospective markets. In our view, 852 2101 7650 the Chinese Oils will have to increase their 2017 capex budget to combat the [email protected] domestic production decline. This should benefit Chinese OFS providers such as Anton Oil. We forecast Anton Oil’s domestic revenue to see 21% top-line growth in 2017 on the back of the upstream capex recovery. In addition, the company has signed a strategic cooperation with HBP and Geo-Jade Petroleum in December 2016, acting as a preferred partner to each other to jointly explore and develop prospective markets plus with synergies among the three OFS players in complementing each other in respective markets. ■ Upgrade to NEUTRAL (from Underperform), new TP HK$1.1. The removal of the near-term overhang, coupled with the improved domestic OFS sector outlook in 2017, should trigger a rerating for Anton Oil. We revise up our 2017/18E EPS and incorporate the enlarged share capital post the capital raise. We raise our TP to HK$1.1 (from HK$0.5), rolling over to 2017 multiple and raising our target multiple to 1.3x P/B (from 0.5x P/B), as well as incorporating the CS house view RMB/USD forecast of 7.33 in our valuation.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 1,833.0 1,569.6 1,893.5 2,128.5 EBITDA (Rmb mn) 280.5 245.0 356.8 421.3 EBIT (Rmb mn) 92.5 72.7 173.1 226.1 Net profit (Rmb mn) (194.7) (150.7) 10.9 58.7 EPS (CS adj.) (Rmb) (0.09) (0.06) 0.00 0.02 Change from previous EPS (%) n.a. - - - Consensus EPS (Rmb) n.a. (0.03) 0.01 0.04 EPS growth (%) n.m. n.m. n.m. 441.1 The price relative chart measures performance against the P/E (x) (11.5) (17.8) 246.9 45.6 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 0.0 0.0 0.0 0.0 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) 15.3 14.7 10.2 8.3

Performance 1M 3M 12M P/B (x) 1.18 1.25 1.25 1.21 Absolute (%) 3.6 30.7 79.7 ROE (%) (9.9) (7.5) 0.5 2.7 Relative (%) 1.0 32.4 61.9 Net debt/equity (%) 93.5 51.6 53.0 46.3

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 59 12 January 2017

Anton Oil (3337.HK / 3337 HK) Price (10 Jan 2017): HK$1.13; Rating: (from UNDERPERFORM) NEUTRAL [V]; Target Price: (from HK$0.50) HK$1.10; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Revenue growth (YoY%) -0.12 -0.14 0.21 0.12 Shares (wtd avg.) (mn) 2,219 2,659 2,659 2,659 EBITDA margin (%) 0.15 0.16 0.19 0.20 EPS (Credit Suisse) (0.09) (0.06) 0.00 0.02 - - - - (Rmb)DPS (Rmb) 0.00 0.00 0.00 0.00 - - - - BVPS (Rmb) 0.85 0.80 0.81 0.83 - - - - Operating CFPS (Rmb) 0.13 0.19 0.07 0.12 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 1,833 1,570 1,894 2,129 P/E (11.5) (17.8) 246.9 45.6 Cost of goods sold 1,250 1,067 1,288 1,447 P/B 1.18 1.25 1.25 1.21 SG & A 0 0 0 0 Dividend yield (%) 0.0 0.0 0.0 0.0 Other operating exp./(inc.) 302 257 249 260 P/CF 7.9 5.3 15.5 8.1 EBITDA 280 245 357 421 EV/sales 2.3 2.3 1.9 1.6 Depreciation & amortisation 188 172 184 195 EV/EBITDA 15.3 14.7 10.2 8.3 EBIT 92 73 173 226 EV/EBIT 46.4 49.4 21.0 15.5 Net interest expense/(inc.) 255 164 165 178 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) (0) 0 0 0 Growth (%) Associates/JV (1) 0 0 0 Sales revenue (11.5) (14.4) 20.6 12.4 Recurring PBT (163) (92) 8 49 EBIT 143.5 (21.4) 138.0 30.6 Exceptionals/extraordinaries 0 0 0 0 Net profit 1.8 22.6 107.2 441.1 Taxes 32 60 (2) (9) EPS 2.7 35.4 107.2 441.1 Profit after tax (195) (152) 10 58 Margins (%) Other after tax income 0 0 0 0 EBITDA 15.3 15.6 18.8 19.8 Minority interests (1) (1) (1) (1) EBIT 5.0 4.6 9.1 10.6 Preferred dividends 0 0 0 0 Pre-tax profit (8.9) (5.8) 0.4 2.3 Reported net profit (195) (151) 11 59 Net profit (10.6) (9.6) 0.6 2.8 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) (195) (151) 11 59 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE (9.9) (7.5) 0.5 2.7 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 2.8 3.4 6.1 8.0 Cash & cash equivalents 469 891 855 1,176 Asset turnover (x) 0.3 0.3 0.3 0.3 Current receivables 1,284 1,075 1,297 1,458 Interest burden (x) (1.8) (1.3) 0.0 0.2 Inventories 834 602 623 583 Tax burden (x) 1.2 1.7 1.2 1.2 Other current assets 532 513 495 479 Financial leverage (x) 3.2 2.8 2.9 3.0 Current assets 3,120 3,081 3,269 3,696 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 2,356 2,383 2,400 2,404 Investments 64 66 68 69 Net debt/equity (%) 93.5 51.6 53.0 46.3 Intangibles 380 387 395 403 Net debt/EBITDA (x) 6.53 4.64 3.29 2.50 Other non-current assets 265 267 270 273 Interest cover (x) 0.36 0.44 1.05 1.27 Total assets 6,183 6,184 6,401 6,845 Accounts payable 1,735 1,763 1,970 2,155 12MF P/E multiple Short-term debt 875 442 442 642 Current provisions 25 25 26 27 Other current liabilities 0 0 0 0 Current liabilities 2,635 2,231 2,438 2,823 Long-term debt 1,585 1,745 1,745 1,745 Non-current provisions 4 5 5 5 Other non-current liabilities 0 0 0 0 Total liabilities 4,224 3,980 4,187 4,573 Shareholders' equity 1,894 2,140 2,151 2,209 Minority interests 66 65 64 63 Total liabilities & equity 6,183 6,184 6,401 6,845 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 92 73 173 226 Net interest (255) (164) (165) (178) Tax paid (60) (62) (0) 7 12MF P/B multiple Working capital 357 488 (18) 80 Other cash & non-cash items 149 172 184 195 Operating cash flow 283 507 174 331 Capex (210) (200) (200) (200) Free cash flow to the firm 73 307 (26) 131 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 13 (8) (8) (8) Associate investments 0 0 0 0 Other investment/(outflows) (0) 0 (0) 0 Investing cash flow (197) (208) (208) (208) Equity raised 0 0 0 0 Dividends paid 0 0 0 0 Net borrowings 0 0 0 0 Other financing cash flow (29) 0 0 0 Financing cash flow (29) 0 0 0 Source: Credit Suisse, Thomson Reuters Total cash flow 57 299 (34) 123 Adjustments 0 0 0 0 Net change in cash 57 299 (34) 123

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 60 12 January 2017

Asia Pacific/China Oil & Gas Equipment & Services

SPT Energy (1251.HK / 1251 HK) Rating NEUTRAL [V] Price (10-Jan-17, HK$) 0.72 INCREASE TARGET PRICE Target price (HK$) (from 0.50) 0.80 Upside/downside (%) 11.1

Mkt cap (HK$/US$ mn) 1,105 / 142.51 In limbo Enterprise value (Rmb mn) 1,177 Number of shares (mn) 1,535 ■ Recovery. SPT Energy has survived the worst OFS sector downturn of the Free float (%) 42.0 past 20 years, reducing its cost base by 50% YoY over the past two years on 52-wk price range (HK$) 0.82-0.46 ADTO-6M (US$ mn) 0.3 the back of a 60% decline in its top line from the peak. This is history. The Target price is for 12 months. focus in 2017 should be on recovery for SPT Energy and the independent [V] = Stock Considered Volatile (see Disclosure Appendix) OFS players.

Research Analysts ■ No clear direction. SPT Energy gives an impression that the company is still

Horace Tse in the transition period following senior management changes over the past 852 2101 7379 [email protected] year (Founder & Chairman Mr Wang Guoqiang resigned as CEO in Aug- Jessie Xu 2016; CFO Mr Sun Siu King resigned in Dec-2015 and was replaced by Mr Li 852 2101 7650 Qiang). This is also a consequence of the OFS sector downturn amid the oil [email protected] price collapse. There is no clear indication to the market as to where the company is allocating its resources and where the future opportunities lie as we are bottoming out of the trough. ■ Maintain NEUTRAL, new TP HK$0.8. Our new target price of HK$0.8 (up from HK$0.5) is based on: (1) raising our target multiple to 1.1x P/B (from 0.6x P/B); (2) rolling forward our valuation to 2017 multiple; (3) incorporating the CS house view RMB/USD forecast of 7.33 in our valuation. We maintain our NEUTRAL rating.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 1,035.0 871.4 982.9 1,336.4 EBITDA (Rmb mn) (346.2) 44.1 174.6 279.2 EBIT (Rmb mn) (448.1) (55.4) 72.5 159.2 Net profit (Rmb mn) (412.2) (85.2) 13.7 66.9 EPS (CS adj.) (Rmb) (0.27) (0.06) 0.01 0.04 Change from previous EPS (%) n.a. - 0.0 0.0 Consensus EPS (Rmb) n.a. (0.06) (0.01) 0.01 EPS growth (%) n.m. n.m. n.m. 388.3 The price relative chart measures performance against the P/E (x) (2.4) (11.6) 72.0 14.7 MSCI CHINA F IDX which closed at 6,226.42 on 10/01/17. Dividend yield (%) 0.0 0.0 0.0 0.0 On 10/01/17 the spot exchange rate was HK$7.75/US$1 EV/EBITDA (x) (2.9) 26.5 7.7 5.4

Performance 1M 3M 12M P/B (x) 0.87 0.95 0.93 0.88 Absolute (%) 2.9 14.5 18.3 ROE (%) (28.4) (7.9) 1.3 6.1 Relative (%) 0.3 16.2 0.5 Net debt/equity (%) 0.8 15.9 30.4 42.7

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 61 12 January 2017

SPT Energy (1251.HK / 1251 HK) Price (10 Jan 2017): HK$0.72; Rating: NEUTRAL [V]; Target Price: (from HK$0.50) HK$0.80; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Revenue growth (YoY%) -0.53 -0.16 0.13 0.36 Shares (wtd avg.) (mn) 1,535 1,535 1,535 1,535 EBITDA margin (%) -0.33 0.05 0.18 0.21 EPS (Credit Suisse) (0.27) (0.06) 0.01 0.04 - - - - (Rmb)DPS (Rmb) 0.00 0.00 0.00 0.00 - - - - BVPS (Rmb) 0.73 0.68 0.69 0.73 - - - - Operating CFPS (Rmb) (0.13) 0.02 0.02 0.02 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 1,035 871 983 1,336 P/E (2.4) (11.6) 72.0 14.7 Cost of goods sold 612 436 491 668 P/B 0.87 0.95 0.93 0.88 SG & A 0 0 0 0 Dividend yield (%) 0.0 0.0 0.0 0.0 Other operating exp./(inc.) 769 392 317 389 P/CF (5.1) 40.0 36.4 37.5 EBITDA (346) 44 175 279 EV/sales 1.0 1.3 1.4 1.1 Depreciation & amortisation 102 99 102 120 EV/EBITDA (2.9) 26.5 7.7 5.4 EBIT (448) (55) 72 159 EV/EBIT (2.2) (21.2) 18.6 9.5 Net interest expense/(inc.) 38 36 52 68 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 0 0 0 0 Growth (%) Associates/JV 0 0 0 0 Sales revenue (52.7) (15.8) 12.8 36.0 Recurring PBT (486) (92) 20 91 EBIT (319.5) 87.6 230.9 119.8 Exceptionals/extraordinaries 0 0 0 0 Net profit (454.8) 79.3 116.1 388.3 Taxes (43) (8) 5 23 EPS (454.4) 79.3 116.1 388.3 Profit after tax (443) (84) 15 68 Margins (%) Other after tax income 0 0 0 0 EBITDA (33.5) 5.1 17.8 20.9 Minority interests (30) 2 2 2 EBIT (43.3) (6.4) 7.4 11.9 Preferred dividends 0 0 0 0 Pre-tax profit (47.0) (10.5) 2.1 6.8 Reported net profit (412) (85) 14 67 Net profit (39.8) (9.8) 1.4 5.0 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) (412) (85) 14 67 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE (28.4) (7.9) 1.3 6.1 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC (26.4) (3.9) 3.8 7.2 Cash & cash equivalents 364 288 315 342 Asset turnover (x) 0.4 0.4 0.4 0.5 Current receivables 632 525 592 805 Interest burden (x) 1.1 1.7 0.3 0.6 Inventories 394 358 350 439 Tax burden (x) 0.9 0.9 0.7 0.8 Other current assets 172 172 172 172 Financial leverage (x) 1.9 1.9 2.1 2.3 Current assets 1,561 1,343 1,430 1,758 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 535 636 734 814 Investments 0 0 0 0 Net debt/equity (%) 0.8 15.9 30.4 42.7 Intangibles 58 58 58 58 Net debt/EBITDA (x) n.a. 4.20 2.05 1.91 Interest cover (x) n.a. n.a. 1.39 2.34 Other non-current assets 196 196 196 196 Total assets 2,350 2,233 2,417 2,826 Accounts payable 554 430 404 549 12MF P/E multiple Short-term debt 260 360 560 760 Current provisions 0 0 0 0 Other current liabilities 152 146 141 136 Current liabilities 965 935 1,104 1,445 Long-term debt 114 114 114 114 Non-current provisions 0 0 0 0 Other non-current liabilities 24 24 24 24 Total liabilities 1,103 1,073 1,242 1,582 Shareholders' equity 1,127 1,042 1,056 1,123 Minority interests 120 121 123 124 Total liabilities & equity 2,350 2,237 2,421 2,830 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT (448) (55) 72 159 Net interest (38) (36) (52) (68) Tax paid (19) 8 (5) (23) 12MF P/B multiple Working capital 565 9 (90) (162) Other cash & non-cash items (255) 99 102 120 Operating cash flow (194) 25 27 26 Capex 0 (200) (200) (200) Free cash flow to the firm (194) (175) (173) (174) Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 8 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 0 0 0 0 Investing cash flow 8 (200) (200) (200) Equity raised 0 0 0 0 Dividends paid 0 0 0 0 Net borrowings 0 0 0 0 Other financing cash flow 3 0 0 0 Financing cash flow 3 0 0 0 Source: Credit Suisse, Thomson Reuters Total cash flow (184) (175) (173) (174) Adjustments 0 0 0 0 Net change in cash (184) (175) (173) (174)

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 62 12 January 2017

Asia Pacific/China Major Chemicals

Wanhua Chemical (600309.SS / 600309 CH) Rating OUTPERFORM Price (10-Jan-17, Rmb) 23.58 INCREASE TARGET PRICE Target price (Rmb) (from 26.00) 28.40 Upside/downside (%) 20.4

Mkt cap (Rmb/US$ mn) 50,988 / 7,370 Entering a normalised growth phase Enterprise value (Rmb mn) 77,708 Number of shares (mn) 2,162 ■ A dominant play in a niche market. Wanhua delivered stable results year to Free float (%) 49.5 date as it is the largest MDI (methylene diphenyl diisocyanat) producer in 52-wk price range (Rmb) 23.71-12.89 ADTO-6M (US$ mn) 32.4 China and has great pricing power over polyurethane markets. Our positive Target price is for 12 months. thesis on Wanhua remains unchanged and we expect the company to

achieve a strong 40% EPS CAGR over 2016-18E. Research Analysts

Horace Tse ■ A roller-coaster year. MDI prices have seen a roller-coaster year, much like 852 2101 7379 oil prices in 2016. The outage in Yantai (600kton) was extended to 65 days [email protected] across September to November from the originally scheduled 30 days in Jessie Xu September and October, due to an accident during its maintenance and the 852 2101 7650 [email protected] investigation afterwards. MDI prices rose sharply during that period, and the pure MDI-benzene spread jumped 60% in November compared with June. ■ Normalised growth pattern. Wanhua ramped up its petrochemicals in 2016 and is now running at close to full utilisation. We expect petrochemicals to contribute over 30% to revenue in 2017 and beyond. Besides 30k tons TDI starting operation in late 2017 or early 2018, there is no major capacity addition in the pipeline for the next few years, signalling a transition to a normalised growth pattern from a capacity expansion cycle. ■ New TP of Rmb28.4; maintain OUTPERFORM. We revise up our 2016-18E revenue forecasts by 1-2% on higher MDI price assumptions as we expect the MDI S&D situation to remain largely stable in China. Our DCF-based target price rises to Rmb28.4 (from Rmb26.0), implying 15x 2017E P/E, lower than its five-year average P/E of 17x. The stock is trading at 12x 2017E P/E. Maintain OUTPERFORM. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 19,492.4 29,258.0 33,169.4 35,626.1 EBITDA (Rmb mn) 5,205.8 7,890.7 8,921.8 9,523.8 EBIT (Rmb mn) 3,659.8 6,354.0 7,248.1 7,748.2 Net profit (Rmb mn) 1,616.7 3,576.3 4,183.3 4,548.0 EPS (CS adj.) (Rmb) 0.75 1.65 1.93 2.10 Change from previous EPS (%) n.a. (0.2) 1.0 2.3 Consensus EPS (Rmb) n.a. 1.39 1.61 1.93 EPS growth (%) (33.2) 121.2 17.0 8.7 The price relative chart measures performance against the P/E (x) 31.5 14.3 12.2 11.2 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 0.8 2.1 2.5 2.7 3,358.40 on 10/01/17. On 10/01/17 the spot exchange rate EV/EBITDA (x) 14.7 9.9 8.5 7.6 was Rmb6.92/US$1 P/B (x) 4.41 3.37 2.64 2.14

Performance 1M 3M 12M ROE (%) 14.6 26.8 24.3 21.1 Absolute (%) 14.6 11.8 50.3 Net debt/equity (%) 173.6 142.8 109.7 79.4

Relative (%) 18.4 10.0 45.1 Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 63 12 January 2017

Wanhua Chemical (600309.SS / 600309 CH) Price (10 Jan 2017): Rmb23.58; Rating: OUTPERFORM; Target Price: (from Rmb26.00) Rmb28.40; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Sales volume of MDI 1,078 1,404 1,476 1,530 Shares (wtd avg.) (mn) 2,162 2,162 2,162 2,162 GP margin of MDI 0.35 0.42 0.42 0.42 EPS (Credit Suisse) 0.75 1.65 1.93 2.10 - - - - (Rmb)DPS (Rmb) 0.20 0.50 0.58 0.63 - - - - BVPS (Rmb) 5.35 7.00 8.94 11.04 - - - - Operating CFPS (Rmb) 2.13 1.36 2.69 3.19 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 19,492 29,258 33,169 35,626 P/E 31.5 14.3 12.2 11.2 Cost of goods sold 13,620 19,854 22,541 24,247 P/B 4.41 3.37 2.64 2.14 SG & A 2,129 2,838 3,217 3,456 Dividend yield (%) 0.8 2.1 2.5 2.7 Other operating exp./(inc.) (1,462) (1,325) (1,511) (1,601) P/CF 11.1 17.3 8.8 7.4 EBITDA 5,206 7,891 8,922 9,524 EV/sales 3.9 2.7 2.3 2.0 Depreciation & amortisation 1,546 1,537 1,674 1,776 EV/EBITDA 14.7 9.9 8.5 7.6 EBIT 3,660 6,354 7,248 7,748 EV/EBIT 21.0 12.2 10.5 9.4 Net interest expense/(inc.) 1,063 1,135 1,121 1,066 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 367 445 499 521 Growth (%) Associates/JV (3) 0 0 0 Sales revenue (11.8) 50.1 13.4 7.4 Recurring PBT 2,961 5,664 6,625 7,203 EBIT (20.1) 73.6 14.1 6.9 Exceptionals/extraordinaries 0 0 0 0 Net profit (33.2) 121.2 17.0 8.7 Taxes 675 1,303 1,524 1,657 EPS (33.2) 121.2 17.0 8.7 Profit after tax 2,286 4,361 5,102 5,546 Margins (%) Other after tax income 0 0 0 0 EBITDA 26.7 27.0 26.9 26.7 Minority interests 670 785 918 998 EBIT 18.8 21.7 21.9 21.7 Preferred dividends 0 0 0 0 Pre-tax profit 15.2 19.4 20.0 20.2 Reported net profit 1,617 3,576 4,183 4,548 Net profit 8.3 12.2 12.6 12.8 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 1,617 3,576 4,183 4,548 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 14.6 26.8 24.3 21.1 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 7.4 11.4 12.0 12.4 Cash & cash equivalents 2,066 2,590 4,979 6,773 Asset turnover (x) 0.4 0.6 0.6 0.6 Current receivables 1,356 1,495 1,915 2,110 Interest burden (x) 0.8 0.9 0.9 0.9 Inventories 4,194 5,343 6,841 7,539 Tax burden (x) 0.8 0.8 0.8 0.8 Other current assets 3,410 5,096 6,017 6,445 Financial leverage (x) 3.2 2.8 2.6 2.3 Current assets 11,027 14,524 19,752 22,868 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 21,048 22,426 22,753 22,588 Investments 186 186 186 186 Net debt/equity (%) 173.6 142.8 109.7 79.4 Intangibles 2,530 2,739 2,939 3,128 Net debt/EBITDA (x) 4.94 3.39 2.80 2.26 Interest cover (x) 3.44 5.60 6.46 7.27 Other non-current assets 13,015 13,015 13,015 13,015 Total assets 47,804 52,889 58,644 61,785 Accounts payable 3,400 3,210 4,065 4,487 12MF P/E multiple Short-term debt 14,372 14,443 15,054 15,355 Current provisions 0 0 0 0 Other current liabilities 1,501 1,280 1,539 1,667 Current liabilities 19,273 18,933 20,659 21,509 Long-term debt 13,420 14,920 14,920 12,920 Non-current provisions 0 0 0 0 Other non-current liabilities 288 288 288 288 Total liabilities 32,981 34,141 35,867 34,717 Shareholders' equity 11,567 15,143 19,327 23,874 Minority interests 3,252 4,037 4,956 5,954 Total liabilities & equity 47,804 52,889 58,644 61,785 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 3,660 6,354 7,248 7,748 Net interest 0 0 0 0 Tax paid (675) (1,303) (1,524) (1,657) 12MF P/B multiple Working capital 954 (3,192) (1,169) (501) Other cash & non-cash items 673 1,080 1,255 1,300 Operating cash flow 4,612 2,939 5,811 6,891 Capex (5,161) (3,100) (2,200) (1,800) Free cash flow to the firm (575) (165) 3,611 5,091 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 63 (25) 0 0 Associate investments 0 0 0 0 Other investment/(outflows) (128) 33 47 102 Investing cash flow (5,225) (3,092) (2,153) (1,698) Equity raised 0 18 0 0 Dividends paid (649) (432) (1,073) (1,255) Net borrowings 3,725 1,500 0 (2,000) Other financing cash flow (1,320) (473) (196) (143) Financing cash flow 1,756 612 (1,269) (3,398) Source: Credit Suisse, Thomson Reuters Total cash flow 1,143 460 2,389 1,795 Adjustments (26) (4) 0 0 Net change in cash 1,117 456 2,389 1,795

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 64 12 January 2017

Asia Pacific/China Oil & Gas Equipment & Services

Yantai Jereh (002353.SZ / 002353 CH) Rating NEUTRAL Price (10-Jan-17, Rmb) 20.11 INCREASE TARGET PRICE Target price (Rmb) (from 20.00) 21.00 Upside/downside (%) 1.0

Mkt cap (Rmb/US$ mn) 19,914 / 2,879 Structural transition Enterprise value (Rmb mn) 17,703 Number of shares (mn) 957.85 ■ Resilience. Yantai Jereh has been profitable in an extremely difficult low-oil Free float (%) 44.1 price environment in 2016, when most of the OFS players were losing money. 52-wk price range (Rmb) 22.19-14.67 ADTO-6M (US$ mn) 39.6 It remained asset light and flexible in order to weather the downturn. We Target price is for 12 months. believe that Jereh is one of the most resilient OFS players in China, and is

well positioned for a recovery in the next two years. Research Analysts

Horace Tse ■ Transition. Jereh has been actively exploring new business in 2016, evident 852 2101 7379 from its two framework agreements signed with Ghana National Gas [email protected] Company (GNGC) with a total contract value of c. US$660 mn (Rmb4.4 bn). Jessie Xu The official contract is expected to be signed before March 2017. The 852 2101 7650 [email protected] company views 2016 as a year of transition and re-organisation, and expects a strong recovery in 2017. We will wait for the official contract and more clarity oN the deal before capturing it in our forecasts. ■ Balance. If the deal went through, the revenue scale would rise significantly, and EPC would become the major business. On the other hand, the transition could lead to a structurally lower margin, since the EPC margin is generally lower than Jereh's traditional OFS business (gross margin 30-45%). Therefore, leveraging between scale and profitability remains a concern. ■ Valuation. As THE oil price is likely to end the year at a higher level post the OPEC deal, we expect Jereh's revenue to pick up from the trough in 2016. We revise up our revenue forecasts for 2017/18 by 10%. Thus, our 2017/18E EPS are lifted by 31-35% on operating leverage and low base. We roll over our valuation base to 2017. Our new TP of Rmb21 (from Rmb20) is based on an unchanged 2.5x P/B. Maintain NEUTRAL.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 2,826.6 2,470.0 2,853.3 3,146.5 EBITDA (Rmb mn) 226.9 121.0 254.8 333.8 EBIT (Rmb mn) 101.3 (28.3) 70.2 113.7 Net profit (Rmb mn) 144.8 102.2 155.1 175.6 EPS (CS adj.) (Rmb) 0.15 0.11 0.16 0.18 Change from previous EPS (%) n.a. 0.0 30.7 34.7 Consensus EPS (Rmb) n.a. 0.17 0.51 0.64 EPS growth (%) (87.9) (29.4) 51.8 13.2 The price relative chart measures performance against the P/E (x) 137.5 194.8 128.4 113.4 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 0.1 0.1 0.2 0.2 3,358.40 on 10/01/17. On 10/01/17 the spot exchange rate EV/EBITDA (x) 82.3 146.2 72.1 56.5 was Rmb6.92/US$1 P/B (x) 2.56 2.53 2.49 2.45

Performance 1M 3M 12M ROE (%) 1.8 1.3 2.0 2.2 Absolute (%) 0.0 4.5 12.8 Net debt/equity (%) Net cash Net cash Net cash Net cash

Relative (%) 2.2 3.5 9.1 Source: Company data, Thomson Reuters, Credit Suisse estimates

China Oil & Gas Sector 65 12 January 2017

Yantai Jereh (002353.SZ / 002353 CH) Price (10 Jan 2017): Rmb20.11; Rating: NEUTRAL; Target Price: (from Rmb20.00) Rmb21.00; Analyst: Horace Tse Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Revenue growth (YoY%) -0.37 -0.12 0.16 0.10 Shares (wtd avg.) (mn) 958 958 958 958 Gross margin (%) 0.32 0.27 0.27 0.27 EPS (Credit Suisse) 0.15 0.11 0.16 0.18 - - - - (Rmb)DPS (Rmb) 0.03 0.02 0.03 0.04 - - - - BVPS (Rmb) 8.14 8.22 8.35 8.50 - - - - Operating CFPS (Rmb) (0.04) 1.39 (0.13) 0.07 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 2,827 2,470 2,853 3,147 P/E 137.5 194.8 128.4 113.4 Cost of goods sold 1,920 1,795 2,073 2,283 P/B 2.56 2.53 2.49 2.45 SG & A 466 375 422 462 Dividend yield (%) 0.1 0.1 0.2 0.2 Other operating exp./(inc.) 215 179 104 68 P/CF (562.4) 14.9 (156.8) 289.5 EBITDA 227 121 255 334 EV/sales 6.6 7.2 6.4 6.0 Depreciation & amortisation 126 149 185 220 EV/EBITDA 82.3 146.2 72.1 56.5 EBIT 101 (28) 70 114 EV/EBIT 184.2 (625.9) 261.7 165.9 Net interest expense/(inc.) 17 (71) (44) (25) Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 104 70 70 70 Growth (%) Associates/JV 0 0 0 0 Sales revenue (36.6) (12.6) 15.5 10.3 Recurring PBT 189 112 184 208 EBIT (92.2) (127.9) 348.4 62.1 Exceptionals/extraordinaries 0 0 0 0 Net profit (87.9) (29.4) 51.8 13.2 Taxes 44 17 28 31 EPS (87.9) (29.4) 51.8 13.2 Profit after tax 145 95 156 177 Margins (%) Other after tax income 0 0 0 0 EBITDA 8.0 4.9 8.9 10.6 Minority interests (0) (7) 1 1 EBIT 3.6 (1.1) 2.5 3.6 Preferred dividends 0 0 0 0 Pre-tax profit 6.7 4.5 6.4 6.6 Reported net profit 145 102 155 176 Net profit 5.1 4.1 5.4 5.6 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 145 102 155 176 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 1.8 1.3 2.0 2.2 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 1.2 (0.4) 1.0 1.4 Cash & cash equivalents 1,833 2,819 2,132 1,636 Asset turnover (x) 0.3 0.2 0.3 0.3 Current receivables 2,223 1,951 2,243 2,466 Interest burden (x) 1.9 (4.0) 2.6 1.8 Inventories 2,180 1,524 1,761 1,939 Tax burden (x) 0.8 0.9 0.9 0.9 Other current assets 1,321 1,321 1,321 1,321 Financial leverage (x) 1.3 1.3 1.3 1.3 Current assets 7,557 7,616 7,456 7,362 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 1,722 1,973 2,388 2,768 Investments 39 41 43 45 Net debt/equity (%) (15.5) (27.6) (18.8) (12.5) Intangibles 304 304 304 304 Net debt/EBITDA (x) (5.50) (18.46) (6.07) (3.14) Interest cover (x) 6.04 n.a. n.a. n.a. Other non-current assets 771 773 775 778 Total assets 10,393 10,707 10,967 11,257 Accounts payable 824 1,033 1,136 1,251 12MF P/E multiple Short-term debt 586 586 586 586 Current provisions 0 0 0 0 Other current liabilities 664 694 725 758 Current liabilities 2,074 2,313 2,447 2,595 Long-term debt 0 0 0 0 Non-current provisions 0 0 0 0 Other non-current liabilities 294 294 294 294 Total liabilities 2,368 2,606 2,741 2,889 Shareholders' equity 7,793 7,875 7,999 8,140 Minority interests 232 225 227 228 Total liabilities & equity 10,393 10,707 10,967 11,257 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 101 (28) 70 114 Net interest 32 71 44 25 Tax paid (71) (17) (28) (31) 12MF P/B multiple Working capital (354) 1,163 (396) (256) Other cash & non-cash items 256 147 182 218 Operating cash flow (35) 1,336 (127) 69 Capex (468) (400) (600) (600) Free cash flow to the firm (503) 936 (727) (531) Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 0 0 0 0 Investing cash flow (468) (400) (600) (600) Equity raised 0 0 0 0 Dividends paid (29) (20) (31) (35) Net borrowings 0 0 0 0 Other financing cash flow (23) 0 0 0 Financing cash flow (51) (20) (31) (35) Source: Credit Suisse, Thomson Reuters Total cash flow (554) 915 (758) (566) Adjustments 0 0 0 0 Net change in cash (554) 915 (758) (566)

Source: Company data, Credit Suisse estimates

China Oil & Gas Sector 66 12 January 2017

Companies Mentioned (Price as of 10-Jan-2017) Advanced (APC.V, C$0.055) Ajisen (0538.HK, HK$3.21) Alimentation Couche-Tard Inc. (ATDb.TO, C$60.73) Anton Oil (3337.HK, HK$1.13, NEUTRAL[V], TP HK$1.1) Apache Corp. (APA.N, $62.87) BJ Hualian (600361.SS, Rmb7.32) BP (BP.N, $37.11) Bharat Petroleum (BPCL.BO, Rs658.45) CNOOC (0883.HK, HK$9.73, OUTPERFORM, TP HK$12.8) COSL (2883.HK, HK$7.62, OUTPERFORM, TP HK$9.0) COSL (601808.SS, Rmb13.06, UNDERPERFORM, TP Rmb8.5) Caltex Australia (CTX.AX, A$30.11) Canadian Natural Resources Limited (CNQ.TO, C$41.18) Caseys General (CASY.OQ, $117.51) Chesapeake (CHKR.N, $2.475) Chevron Corp. (CVX.N, $114.96) China Life (2628.HK, HK$21.1) Concho Resources, Inc. (CXO.N, $133.69) Couche Tard (ATDa.TO, C$63.0) Devon Energy Corp (DVN.N, $46.7) Dow Chemical Company (DOW.N, $57.67) EOG Resources (EOG.N, $103.4) Encana Corp. (ECA.N, $12.79) ExxonMobil Corporation (XOM.N, $85.93) Formosa Chemical & Fibre (1326.TW, NT$95.6) Formosa Petrochemical (6505.TW, NT$108.5) Formosa Plastics (1301.TW, NT$89.5) GOME Electrical Appliances Holding Limited (0493.HK, HK$0.93) GS Holdings (078930.KS, W52,600) Haier Electronics Group Co., Ltd. (1169.HK, HK$13.84) Hanwha Chemical (009830.KS, W26,200) Hilong (1623.HK, HK$2.09, OUTPERFORM[V], TP HK$2.5) Hindustan Petroleum (HPCL.BO, Rs478.0) IRPC PCL (IRPC.BK, Bt5.1) Indian Oil Corp Limited (IOC.BO, Rs346.4) Indorama Ventures PCL (IVL.BK, Bt37.0) Jingkelong (0814.HK, HK$1.62) KFC (3420.T, ¥2,058) Kunlun Energy (0135.HK, HK$6.0, UNDERPERFORM, TP HK$4.9) LG Chem Ltd. (051910.KS, W267,500) Lianhua (0980.HK, HK$3.02) Lotte Chemical (011170.KS, W375,000) McDonald's Corp (MCD.N, $120.25) Murphy USA (MUSA.N, $62.66) Nan Ya Plastics (1303.TW, NT$73.1) Noble Energy (NBL.N, $36.99) OGDCL (OGDCq.L, $16.1) Occidental Petroleum (OXY.N, $69.35) Oil India (OILI.NS, Rs482.4) Oil and Natural Gas Corporation Limited (ONGC.BO, Rs197.9) PTT Global Chemical (PTTGC.BK, Bt63.5) PetroChina (0857.HK, HK$6.18, NEUTRAL, TP HK$7.0) PetroChina (601857.SS, Rmb8.4, UNDERPERFORM, TP Rmb6.6) Petronas Chemicals Group BHD (PCGB.KL, RM7.17) Pioneer Natural Resources (PXD.N, $181.27) Range Resources (RRC.N, $33.36) Reliance Industries Limited (RELI.BO, Rs1087.1) S-Oil Corp (010950.KS, W84,700) SK Innovation (096770.KS, W155,500) SPT Energy (1251.HK, HK$0.72, NEUTRAL[V], TP HK$0.8) Siam Cement (SCC.BK, Bt498.0) Sinopec (0386.HK, HK$5.9, OUTPERFORM, TP HK$7.3) Sinopec (600028.SS, Rmb5.9, OUTPERFORM, TP Rmb6.9) Sinopec Engineering (2386.HK, HK$6.33, UNDERPERFORM, TP HK$5.3) Sinopec Kantons (0934.HK, HK$3.53, OUTPERFORM, TP HK$5.1) Sinopec SSC (1033.HK, HK$1.51, UNDERPERFORM[V], TP HK$1.0) Sinopec SSC (600871.SS, Rmb4.21, UNDERPERFORM[V], TP Rmb0.8) Sinopec Shanghai Petrochemical (0338.HK, HK$4.43, OUTPERFORM, TP HK$5.5) Skyworth Digital (0751.HK, HK$4.59) Statoil (STO.N, $18.53) Sun Art Retail Group (6808.HK, HK$7.85) Sunoco, LP (SUN.N, $26.75) TCL Multimedia (1070.HK, HK$3.86) Tencent Holdings (NNND.F, €24.61) Thai Oil (TOP.BK, Bt69.0) Wanhua Chemical (600309.SS, Rmb23.58, OUTPERFORM, TP Rmb28.4) Westlake Chem (WLK.N, $58.04) Woolworths (WOW.AX, A$24.21) Yantai Jereh (002353.SZ, Rmb20.79, NEUTRAL, TP Rmb21.0) Yonghui Superstores (601933.SS, Rmb5.13)

Disclosure Appendix

China Oil & Gas Sector 67 12 January 2017

Analyst Certification Horace Tse and Jessie Xu each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Anton Oil (3337.HK)

3337.HK Closing Price Target Price Date (HK$) (HK$) Rating 16-Jan-14 6.06 3.50 U 27-Aug-14 3.98 2.00 27-Oct-14 2.15 1.40 18-Jan-15 1.73 0.90 26-Mar-15 1.34 0.50 21-Jul-15 1.47 0.80 20-Jan-16 0.66 0.40 29-Aug-16 0.73 0.50 * Asterisk signifies initiation or assumption of coverage. UNDERPERFORM

3-Year Price and Rating History for CNOOC (0883.HK)

0883.HK Closing Price Target Price Date (HK$) (HK$) Rating 21-Jan-14 13.08 16.00 N 28-Mar-14 12.32 12.00 24-Jun-14 13.56 12.60 03-Jul-14 14.04 11.00 U 18-Aug-14 15.24 13.50 N 05-Oct-14 13.14 12.00 15-Oct-14 12.26 11.50 04-Dec-14 10.98 10.00 02-Jan-15 10.62 11.50 19-Jan-15 10.56 11.00 NEUTRAL UNDERPERFORM 26-Jan-15 10.54 10.00 REST RICT ED 03-Feb-15 10.64 11.30 OUTPERFORM

28-Apr-15 13.30 R 29-Apr-15 13.06 11.30 N 26-Aug-15 8.06 12.00 O 09-Sep-15 9.42 10.70 19-Jan-16 7.01 9.20 27-Jan-16 7.01 8.70 24-Mar-16 8.96 11.00 05-Jul-16 9.57 11.20 * 13-Jul-16 9.82 11.50 08-Aug-16 9.26 7.00 U * Asterisk signifies initiation or assumption of coverage.

China Oil & Gas Sector 68 12 January 2017

3-Year Price and Rating History for COSL (2883.HK)

2883.HK Closing Price Target Price Date (HK$) (HK$) Rating 27-Jan-14 22.95 25.00 O 29-Apr-14 18.70 24.00 11-Jun-14 19.78 23.00 26-Aug-14 20.10 24.00 16-Oct-14 17.98 21.50 * 10-Dec-14 13.28 17.50 19-Jan-15 13.34 16.50 26-Jan-15 13.48 16.00 03-Feb-15 13.14 15.20 31-Mar-15 12.90 16.00 OUTPERFORM

30-Apr-15 16.00 19.00 13-Jul-15 10.62 13.00 28-Aug-15 8.44 10.00 07-Oct-15 9.49 11.50 20-Jan-16 4.89 6.80 07-Mar-16 6.29 8.00 25-Jul-16 6.21 7.00 11-Sep-16 6.37 8.00 26-Oct-16 7.71 10.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for COSL (601808.SS)

601808.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 16-Oct-14 18.63 17.00 N * 19-Jan-15 18.39 13.20 U 26-Jan-15 19.45 12.80 30-Apr-15 26.71 15.00 07-Oct-15 15.74 9.50 20-Jan-16 13.17 6.00 07-Mar-16 13.30 7.00 25-Jul-16 12.39 6.10 11-Sep-16 12.17 7.00 26-Oct-16 12.29 8.70 NEUTRAL UNDERPERFORM * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Hilong (1623.HK)

1623.HK Closing Price Target Price Date (HK$) (HK$) Rating 24-Mar-14 4.25 5.10 N 25-Mar-14 4.07 5.10 O 24-Aug-14 4.29 4.70 16-Oct-14 2.89 3.00 N 16-Jan-15 2.37 2.40 23-Mar-15 1.95 1.90 24-Aug-15 1.50 1.75 20-Jan-16 0.97 1.00 26-Jul-16 1.09 1.50 O 29-Aug-16 0.90 1.80 NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

China Oil & Gas Sector 69 12 January 2017

3-Year Price and Rating History for Kunlun Energy (0135.HK)

0135.HK Closing Price Target Price Date (HK$) (HK$) Rating 19-Mar-14 13.60 15.20 N 03-Jul-14 12.50 12.50 28-Aug-14 12.92 11.10 16-Oct-14 10.20 10.50 25-Nov-14 8.85 8.00 04-Dec-14 8.04 7.80 05-Mar-15 7.56 7.40 07-Aug-15 7.18 6.80 09-Sep-15 5.82 5.70 26-Nov-15 6.94 6.59 NEUTRAL UNDERPERFORM 04-Jan-16 6.72 7.30 20-Jan-16 5.17 6.00 27-Jan-16 5.35 5.70 05-Jul-16 6.39 5.70 * 19-Aug-16 6.06 4.80 U * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for PetroChina (0857.HK)

0857.HK Closing Price Target Price Date (HK$) (HK$) Rating 20-Mar-14 7.59 6.97 U 14-Apr-14 8.81 8.56 N 24-Jun-14 9.58 8.76 29-Jul-14 10.39 9.26 28-Aug-14 10.91 10.25 05-Oct-14 9.95 9.66 15-Oct-14 9.28 9.26 * 24-Nov-14 8.95 7.47 04-Dec-14 8.46 7.37 02-Jan-15 8.65 8.56 UNDERPERFORM NEUTRAL 19-Jan-15 8.46 7.47 U 26-Jan-15 8.79 6.77 02-Mar-15 8.90 6.47 28-Apr-15 10.09 8.56 28-Jul-15 7.59 8.66 N 28-Aug-15 6.46 7.37 09-Sep-15 6.27 5.97 18-Nov-15 5.39 5.57 20-Jan-16 4.21 4.68 27-Jan-16 4.49 4.28 24-Mar-16 5.12 3.98 U 05-Jul-16 5.21 3.98 * 13-Jul-16 5.39 4.10 27-Sep-16 5.00 3.80 14-Dec-16 6.02 6.30 N * Asterisk signifies initiation or assumption of coverage.

China Oil & Gas Sector 70 12 January 2017

3-Year Price and Rating History for PetroChina (601857.SS)

601857.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 15-Oct-14 7.75 7.40 N * 19-Jan-15 11.44 6.00 26-Jan-15 13.09 5.40 28-Apr-15 14.33 6.80 28-Jul-15 11.85 6.90 28-Aug-15 9.14 5.90 09-Sep-15 9.01 4.80 18-Nov-15 9.05 4.40 20-Jan-16 7.46 4.10 U 27-Jan-16 7.28 3.70 NEUTRAL UNDERPERFORM 24-Mar-16 7.63 3.50 05-Jul-16 7.30 3.50 * 13-Jul-16 7.41 3.60 27-Sep-16 7.21 3.30 14-Dec-16 7.75 5.60 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for SPT Energy (1251.HK)

1251.HK Closing Price Target Price Date (HK$) (HK$) Rating 12-Feb-14 4.42 3.00 U 09-Oct-14 2.84 2.00 19-Jan-15 1.34 1.00 24-Mar-15 1.28 0.75 27-Jul-15 0.95 0.70 26-Aug-15 0.66 0.45 20-Jan-16 0.56 0.40 22-Mar-16 0.63 0.20 24-Aug-16 0.48 0.50 N

UNDERPERFORM * Asterisk signifies initiation or assumption of coverage. NEUTRAL

China Oil & Gas Sector 71 12 January 2017

3-Year Price and Rating History for Sinopec (0386.HK)

0386.HK Closing Price Target Price Date (HK$) (HK$) Rating 21-Jan-14 6.37 8.00 O 19-Feb-14 6.05 8.70 10-Mar-14 6.92 10.00 05-Oct-14 6.69 9.50 16-Oct-14 6.51 9.00 * 04-Dec-14 6.52 8.50 02-Jan-15 6.28 9.20 19-Jan-15 6.06 7.50 26-Jan-15 6.26 7.00 05-Mar-15 6.23 7.50 OUTPERFORM NEUTRAL 30-Apr-15 7.26 8.50 26-Aug-15 4.95 7.00 09-Sep-15 5.37 5.80 18-Nov-15 4.95 5.70 20-Jan-16 3.88 5.00 27-Jan-16 4.11 4.80 30-Mar-16 4.99 4.80 N 05-Jul-16 5.52 5.00 * 29-Aug-16 5.61 5.90 13-Dec-16 5.62 6.10 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Sinopec (600028.SS)

600028.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 16-Oct-14 5.19 7.10 O * 04-Dec-14 6.25 6.80 19-Jan-15 6.24 6.00 U 05-Mar-15 5.95 5.50 20-Jan-16 4.49 4.40 N 27-Jan-16 4.36 4.20 05-Jul-16 4.81 4.40 * 29-Aug-16 4.95 5.20 13-Dec-16 5.51 5.30 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM UNDERPERFORM NEUTRAL

3-Year Price and Rating History for Sinopec Engineering (2386.HK)

2386.HK Closing Price Target Price Date (HK$) (HK$) Rating 15-Jan-14 10.66 9.00 U * 15-Apr-14 8.75 8.00 18-Aug-14 8.70 7.80 16-Oct-14 8.24 7.40 11-Nov-14 6.95 5.50 19-Jan-15 5.50 5.00 31-Aug-15 6.69 5.50 05-Jul-16 6.96 5.50 * 25-Jul-16 6.68 5.30

UNDERPERFORM * Asterisk signifies initiation or assumption of coverage.

China Oil & Gas Sector 72 12 January 2017

3-Year Price and Rating History for Sinopec Kantons (0934.HK)

0934.HK Closing Price Target Price Date (HK$) (HK$) Rating 01-Apr-14 8.10 9.00 O 22-Aug-14 6.69 8.30 31-Dec-14 6.21 8.50 05-Mar-15 5.71 8.10 04-Jan-16 4.62 8.40 20-Jan-16 3.70 5.60 05-Jul-16 4.06 5.00 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

3-Year Price and Rating History for Sinopec SSC (1033.HK)

1033.HK Closing Price Target Price Date (HK$) (HK$) Rating 15-Oct-14 3.45 4.00 O * 19-Jan-15 2.39 3.50 27-Jan-15 2.41 3.30 23-Mar-15 3.15 2.90 N 24-Mar-15 3.07 2.85 29-Apr-15 4.66 4.50 14-Jul-15 2.83 2.90 26-Aug-15 2.00 2.25 09-Oct-15 2.58 1.90 U 12-Jan-16 1.79 1.50 OUTPERFORM NEUTRAL 05-Jul-16 1.49 1.20 * UNDERPERFORM 12-Jul-16 1.62 1.10 31-Aug-16 1.46 1.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Sinopec SSC (600871.SS)

600871.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 15-Oct-14 4.29 3.20 U * 27-Jan-15 5.97 2.62 23-Mar-15 9.21 2.30 24-Mar-15 9.67 2.26 29-Apr-15 10.47 3.60 14-Jul-15 9.09 2.30 26-Aug-15 6.37 1.90 09-Oct-15 9.57 1.60 12-Jan-16 6.73 1.20 05-Jul-16 3.91 1.00 * UNDERPERFORM

12-Jul-16 4.25 0.90 31-Aug-16 3.88 0.80 * Asterisk signifies initiation or assumption of coverage.

China Oil & Gas Sector 73 12 January 2017

3-Year Price and Rating History for Sinopec Shanghai Petrochemical (0338.HK)

0338.HK Closing Price Target Price Date (HK$) (HK$) Rating 02-Nov-15 3.27 4.20 O * 01-Mar-16 3.50 4.70 16-Jun-16 3.53 4.70 * 17-Jun-16 3.51 * 24-Aug-16 3.90 4.80 O * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

3-Year Price and Rating History for Wanhua Chemical (600309.SS)

600309.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 21-Oct-14 17.62 23.17 O * 17-Mar-15 22.35 27.70 20-Jan-16 15.75 21.80 16-Jun-16 17.28 * 09-Aug-16 20.52 24.00 O * 27-Oct-16 21.37 26.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Yantai Jereh (002353.SZ)

002353.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 22-Oct-14 34.52 50.00 O * 02-Feb-15 34.66 42.00 30-Mar-15 40.35 47.00 02-Nov-15 26.13 30.00 20-Jan-16 17.33 21.00 31-Oct-16 18.14 20.00 N * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18

China Oil & Gas Sector 74 12 January 2017

May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (54% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html . Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research:

Target Price and Rating Valuation Methodology and Risks: (12 months) for Anton Oil (3337.HK) Method: Our HK$1.1/share target price for Anton Oilfield Services Ltd (Anton Oil) is based on 1.3x 2017E P/B, 1STD below its own historical average. We rate Anton Oil NEUTRAL on (1) the removal of near-term overhang, (2) improved domestic OFS sector outlook, and (3) fair valuation. Risk: Risks to our HK$1.1/share target price and NEUTRAL rating for Anton Oilfield Services Group (Anton Oil) include: (1) Anti-corruption investigations surrounding the oil sector in China dragging on order momentum for Anton; (2) slower capex spend from international oil companies in 2017 and beyond given sharp correction in oil price, dragging on earnings growth in the next 2-3 years; (3) market share loss to competitors; and (4) order delays or cancellations. Target Price and Rating Valuation Methodology and Risks: (12 months) for CNOOC (0883.HK) Method: Our target price of HK$12.8/share for China National Offshore Oil Corp (CNOOC) is DCF (discounted cash flow)-based, using a WACC (weighted average cost of capital) of 8%, perpetual growth rate of 2% and long-term oil price of US$65/bbl.. We rate CNOOC as OUTPERFORM because CNOOC has thus far demonstrated faster response to the current downturn by scaling back on both capex and costs, which will protect the company over the downcycle and position it well for any potential oil price recovery.

China Oil & Gas Sector 75 12 January 2017

Risk: Risks to our target price of HK$12.8/share for China National Offshore Oil Corp (CNOOC) and OUTPERFORM rating is sustained weak oil prices. The political uncertainty in the Middle East (Iraq, Libya), concerns on Europe's debt crisis and the global economic recovery also pose risks to our oil price assumption and overall equity market. Target Price and Rating Valuation Methodology and Risks: (12 months) for COSL (2883.HK) Method: Our target price of HK$9.0/share for China Oilfield Services Ltd (COSL) - H is based on a target multiple of 1.1x 2017E P/B, below COSL's historical P/B trading range. COSL has a strong balance sheet relative to its peers which is critical during the current downcycle, hence we continue to rate the stock OUTPERFORM. Risk: Risks to our HK$9.0/share target price and OUTPERFORM rating for China Oilfield Services Ltd (COSL) - H include capex reduction by global oil companies given continued oil price correction. A reduction in upstream capex means that COSL's revenue could decrease from our base case. In addition, a cutback in upstream capex spend could mean that global rig demand comes down, which in turn affects global rig dayrates. Target Price and Rating Valuation Methodology and Risks: (12 months) for COSL (601808.SS) Method: Our Rmb8.5/share target price for China Oilfield Services Ltd (COSL) - A is converted from our target price for China Oilfield Services Ltd H (HK$9.0/share) using CNY/HKD exchange rate assumption of 7.33. Our HK$9.0/share target price for China Oilfield Services Ltd H is derived from applying a 1.1x 2017E P/B target multiple, which is below COSL's historical P/B trading range. We believe the valuation of COSL - A is too expensive trading at around 90% premium to COSL - H, hence we continue to rate the stock UNDERPERFORM. Risk: Risks to our Rmb8.5/share target price and UNDERPERFORM rating for China Oilfield Services Ltd (COSL) - A include a higher oil price environment vs CS expectations, which could lead to capex recovery from oil companies. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hilong (1623.HK) Method: Our HK$2.5/share target price for Hilong Holdings Ltd (Hilong) is based on 1.2x 2017E P/B, in-line with its five-year historical average. We rate Hilong an OUTPERFORM, as Hilong's valuation discount vs peers Anton/SPT (at 1.1-1.2x) is unjustified given its earnings quality plus balance sheet strength (lowest gearing). Risk: Risks to our HK$2.5/share target price and OUTPERFORM rating for Hilong Holdings Ltd (Hilong) include: (1) anti-corruption investigations surrounding the oil sector in China dragging on order momentum for Hilong; (2) slower capex spend from international oil companies in 2015 and beyond given sharp correction in oil price, dragging on Hilong's earnings growth in the next 2-3 years; (3) market share loss to competitors like National Oilwell Varco (NOV); and (4) order delays or cancellations. Target Price and Rating Valuation Methodology and Risks: (12 months) for Kunlun Energy (0135.HK) Method: We use a SOTP (sum-of-the-parts) valuation for Kunlun's target price of HK$4.9. Valuations for the E&P business, LNG refuelling/processing and Pipeline business were derived from a DCF (discounted cash flow) model, with a discount rate of 8.1% and terminal growth rate of 2%. City gas distribution business is valued at 10x 2017E P/E (price-to-earnings). LNG terminals are valued at 1x 2017E P/B. Our TP also incorporated Kunlun Gas acquisition which we assumed to be fully funded through debt. We rate Kunlun UNDERPERFORM on: (1) Operational divergence vs peers; (2) Potential E&P impairment; (3) uncertainty on S-J Pipeline transmission tariff on current gas tariff consultation. Risk: Risks that could impede achievement of our HK$4.9 target price and our investment rating of UNDERPERFORM for Kunlun Energy include: (1) an unexpected transmission tariff increase; (2) better-than-expected gas consumption growth in China; and (3) a much faster adoption of liquefied natural gas (LNG) fuels and sharp decline in gas input cost that would boost LNG fuel business. Target Price and Rating Valuation Methodology and Risks: (12 months) for PetroChina (0857.HK)

Method: Our HK$7.0/share target price for PetroChina – H is based on our sum-of-the-parts (SoTP) valuation. We value PetroChina’s exploration and production business using DCF (discounted cash flow) at a 8% discount rate, 2% perpetual growth rate and a long-term crude oil price of US$65/bbl. We value the refining at 4x EV/EBITDA and chemical at 4x EV/EBITDA. We value the marketing business at 3x EV/EBITDA (enterprise value-to-earnings before interest, tax, depreciation and amortisation). We value Pipeline at Rmb960 bn, as an read-through from Sinopec pipeline transaction.. We rate PetroChina NEUTRAL because of (1) concerns on natural gas business outlook, and (2) share price is fair valued. Risk: Key risks to our HK$7.0 share target price for PetroChina and our NEUTRAL investment call include a higher-than-expected oil price and an unexpected uptick in the chemical market. Plus, a faster-than-expected pace of the natural gas price reform roll-out would also pose upside risk to our forecasts.

China Oil & Gas Sector 76 12 January 2017

Target Price and Rating Valuation Methodology and Risks: (12 months) for PetroChina (601857.SS) Method: Our Rmb6.6/share target price for PetroChina-A is converted from our target price for PetroChina-H (HK$7.0) using the forward CNY/USD exchange rate of 7.33 from CS FX Research. Our HK$7.0/share target price for PetroChina is based on our sum-of-the-parts (SoTP) valuation. We value PetroChina’s exploration and production business using DCF (discounted cash flow) at a 8% discount rate, 2% perpetual growth rate and a long-term crude oil price of US$65/bbl. We value the refining at 4x EV/EBITDA and chemical at 4x EV/EBITDA. We value the marketing business at 3x EV/EBITDA (enterprise value-to-earnings before interest, tax, depreciation and amortisation). We value Pipeline at Rmb960 bn, as an read-through from Sinopec pipeline transaction. We rate PetroChina (A) as UNDERPERFORM because of (1) concerns on natural gas business outlook, and (2) A-share valuation is stretched with 51% premium to H-share. Risk: Key risks to our Rmb6.6/share target price for PetroChina-A and our UNDERPERFORM investment call include a higher-than-expected oil price and an unexpected uptick in the chemical market. Plus, a faster-than-expected pace of the natural gas price reform roll-out would also pose upside risk to our forecasts. Target Price and Rating Valuation Methodology and Risks: (12 months) for SPT Energy (1251.HK) Method: Our HK$0.8/share target price for SPT Energy Group Inc. (SPT Energy) is based on a 1.1x 2017E P/B (price-to-book value). This is in line with the target multiple we apply to SPT Energy's independent OFS peers in China like COSL. We rate SPT Energy NEUTRAL for (1) the company is moving toward the right direction – cost control; (2) the bankruptcy risk or concerns on working capital turnover have ease off significantly; and (3) we believe valuation is fair trading around 1.1x P/B. Risk: Risks to our HK$0.8/share target price and NEUTRAL rating for SPT Energy Group Inc. (SPT Energy) include: (1) significant fluctuation in Kazakhstan Tenge (KZY) after moving to free-float effective 20 August 2015, given close to 50% of its revenue is generated from Kazakhstan; (2) a sharp decline or fluctuation of oil price; and (3) policies announced by the Chinese government that discourage shale capex investment by oil companies. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinopec (0386.HK) Method: Our target price of HK$7.3/share for Sinopec - H (China Petroleum & Chemical Corp) is based on our sum-of-the-parts (SoTP) valuation. We value Sinopec's Exploration & Production business with DCF (discounted cash flow) and an 8% discount rate, 2% perpetual growth rate and long-term crude oil price of US$65/bbl.. We value Sinopec's downstream businesses on valuation multiples: the refining business at 7x EV/EBITDA , chemicals at 6x EV/EBITDA and marketing business at Rmb357 bn, marking to market following 30% sell-down. Our OUTPERFORM rating is based on the rationale that (1) upstream to recover from rising crude oil prices, and (2) Sinopec has a large exposure to downstream business which offers stable earnings. Risk: Risks that could impede achievement of our HK$7.3/share target price for Sinopec - H (China Petroleum & Chemical Corp) and our OUTPERFORM rating include: (1) A slowdown in the Chinese economy dragging on domestic oil demand and petrochemical demand. Sinopec as the largest downstream manufacturer in China would be impacted. (2) A sharp correction in oil price. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinopec (600028.SS) Method: Our target price of Rmb6.9/share for Sinopec - A (China Petroleum & Chemical Corp) is based on our sum-of-the-parts (SoTP) valuation. We value Sinopec's Exploration & Production business with DCF (discounted cash flow) and an 8% discount rate, 2% perpetual growth rate and long-term crude oil price of US$65/bbl.. We value Sinopec's downstream businesses on valuation multiples: the refining business at 7x EV/EBITDA , chemicals at 6x EV/EBITDA and marketing business at Rmb357bn, marking to market following 30% sell-down. Our OUTPERFORM rating is based on the rationale that (1) upstream to recover from rising crude oil prices, and (2) Sinopec has a large exposure to downstream business which offers stable earnings. Risk: Risks that could impede achievement of our Rmb6.9/share target price for Sinopec - A (China Petroleum & Chemical Corp) and our OUTPERFORM rating include: (1) A slowdown in the Chinese economy dragging on domestic oil demand and petrochemical demand. Sinopec as the largest downstream manufacturer in China would be impacted. (2) A sharp correction in oil price. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinopec Engineering (2386.HK) Method: Our HK$5.3/shr target price for Sinopec Engineering (Group) Co Ltd is based on 0.8x 2017E P/B (price-to-book), in line with China infrastructure EPC peers. Our UNDERPERFORM rating is based on (1) limited capacity expansion from both domestic and international players on traditional refining and petrochemical and (2) domestic coal chemical projects could see further delays on lower oil price and increasing regulatory scrutiny. Risk: Upside risks to our HK$5.3/shr target price and UNDERPERFORM rating for Sinopec Engineering (Group) Co Ltd (SEG) and our UNDERPERFORM investment call include: (1) government policy over CTC (coal-to-chemical) projects changing from “encouraging

China Oil & Gas Sector 77 12 January 2017

demonstrative projects” to “encouraging large-scale roll out”; (2) SEG showing higher-than-expected competitiveness in both domestic and international markets; and (3) Sinopec's capex for downstream increases. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinopec Kantons (0934.HK) Method: Our target price of HK$5.1 for Sinopec Kantons Holdings Ltd based on 9.5x 2017E P/E, in line with its own historical average since derated in mid-2015. We maintain OUTPERFORM rating, as (1) it will benefit from rising crude oil imports to China, (2) Yu-Ji pipeline is set to recover from the bottom in 2016, and (3) severely under-valued. Risk: Risks that may impede achievement of our target price of HK$5.1 for Sinopec Kantons Holdings Ltd and our OUTPERFORM investment rating include delays of refinery expansion at Sinopec, greater-than-expected capex for its previous acquired assets, delays of its assets commencing operation and slow ramp up of transmission volume of the Yu-Ji pipeline due to weak demand. The domestic macro environment and unforeseen increases in domestic oil production also present risks. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinopec SSC (1033.HK) Method: Our HK$1.0 target price for Sinopec SSC - H is based on 0.8x 2017E P/B. It is much bigger than independent OFSs in both scale and scope. SSC's business encompasses the entire life cycle of oil & gas production, whereas independent OFSs provide technical support to only a certain a section of a drilling cycle (mostly in well completion and down-hole operation). Therefore, we think SOSC's closest peers are integrated oilfield service providers—US Land Drillers. Our UNDERPERFORM rating is based on the view of potentially continued upstream capex cut from upstream players, especially Sinopec, in view of the depressed oil price. Risk: Risks to our HK$1.0 target price and UNDERPERFORM rating for Sinopec SSC - H include: Sharp rebound of oil and gas price; sharp increase of Sinopec's upstream capex; Sinopec's shale gas development disturbed by either technical or other challenges; worse-than- expected margins from overseas projects. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinopec SSC (600871.SS) Method: Our Rmb0.8 target price for Sinopec SSC - A is based on 0.6x 2016E P/B in line the US land drillers. It is much bigger than independent OFSs in both scale and scope. SSC's business encompasses the entire life cycle of oil & gas production, whereas independent OFSs provide technical support to only a certain a section of a drilling cycle (mostly in well completion and down-hole operation). Therefore, we think SOSC's closest peers are integrated oilfield service providers—US Land Drillers. Our UNDERPERFORM rating is based on the view of potentially continued upstream capex cut from upstream players, especially Sinopec, in view of the depressed oil price. Risk: Risks that could impede achievement of our Rmb0.8 target price and UNDERPERFORM rating for Sinopec SSC - A include: Sharp rebound of oil and gas price; sharp increase of Sinopec's upstream capex; Sinopec's shale gas development disturbed by either technical or other challenges; worse-than-expected margins from overseas projects. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinopec Shanghai Petrochemical (0338.HK) Method: Our target price of HK$5.50 for Sinopec Shanghai Petrochemical-H (SPC-H) is based on discounted cash flow method. Key assumptions include 1% terminal growth rate, 8% cost of capital (based on 5% cost of debt, 2.5% risk-free rate and 5.5% equity risk premium). With governance reform in place, SPC offers a unique scope of bold shareholder distribution in coming years, given massive decline in capex, relative to its cash flow, amid revitalised GRM dynamics in China as well as a solid consumer commodity chemical cycle. We maintain our OUTPERFORM rating. Risk: Risks that could impede achievement of our target price of HK$5.50 and OUTPERFORM rating for Sinopec Shanghai Petrochemical include: (1) high and/or volatile oil price; (2) performance is highly susceptible to governmental policy development; (3) execution delay of fuel standard upgrade project; (4) significant slowdown in China's economic growth; (5) dilutive asset injection. Target Price and Rating Valuation Methodology and Risks: (12 months) for Wanhua Chemical (600309.SS) Method: Our target price of Rmb28.4 for Wanhua Chemical Group is based on discounted cash flow method. Key assumptions include 1% terminal growth rate, 9.2% cost of capital (based on 5% cost of debt, 2.7% risk-free rate and 6.5% equity risk premium). Our target price implies 15x2017E P/E. Wanhua remains a quality growth story in a seller's market, given its growing share in high-margin products, along with continued integration/diversification within polyurethane chain. We maintain our OUTPERFORM rating. Risk: Key risks to our TP of Rmb28.4 and current rating for Wanhua Chemical Group include: (1) failure to ramp up production of new expansion; (2) lower-than-expected demand growth from PU in China; (3) significant surge of raw material costs; and (4) rising net gearing ratio. Target Price and Rating Valuation Methodology and Risks: (12 months) for Yantai Jereh (002353.SZ)

China Oil & Gas Sector 78 12 January 2017

Method: Our Rmb21.0/share target price for Yantai Jereh Oilfield Services (Jereh) is based on 2.5x 2017 P/B, which is below its historical P/B average since its IPO in 2010. The stock has been trading at a premium to its HK-listed independent OFS peers in the past given its dominant market share. We rate Jereh NEUTRAL, as we believe the company's strong balance sheet position will enable it to benefit from the industry downturn, taking on potential M&A opportunities that emerges through distressed sale, while on the other side, the recovery seems to be slower than peers and the uncertainty on new contract recognition is also a concern. Risk: Risks to our Rmb21.0/share target price and NEUTRAL rating for Yantai Jereh Oilfield Services (Jereh) include: (1) A sharp correction in oil and gas prices which would reduce cash flows and capex spend. Jereh’s growth outlook could be drastically reduced in such a scenario given some of the resources will be rendered non-economical. (2) Competition from both domestic players (Kingdream) and international players (Schlumberger, Halliburton etc) are a threat to Jereh. Such pressure could drive ASPs down and affect Jereh’s revenue and margin.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (0338.HK, 0386.HK, 0857.HK, 0883.HK, 1033.HK, 2386.HK, 2883.HK, 600028.SS, 600871.SS, 601808.SS, 601857.SS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (002353.SZ, 0338.HK, 0386.HK, 0857.HK, 0883.HK, 0934.HK, 1033.HK, 1251.HK, 2386.HK, 2883.HK, 3337.HK, 600028.SS, 600871.SS, 601808.SS, 601857.SS) within the next 3 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (BPCL.BO, HPCL.BO, IOC.BO, RELI.BO, ONGC.BO, OILI.NS) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0386.HK, 0857.HK). Credit Suisse has a material conflict of interest with the subject company (0857.HK) . Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has neither reviewed nor approved this report and/or any of the statements made herein. Credit Suisse is engaged as Financial Advisor to Shanghai Yiguo E-commerce Co., Ltd. for the purchase of shares in Lianhua Supermarket Holdings Co., Ltd. (0980.HK) from Yonghui Superstores Co., Ltd. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=277503&v=6jom7zycrv4hsy9syl21ed6ut . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0135.HK, 0857.HK, 0883.HK, 2883.HK, 601808.SS, 601857.SS) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse (Hong Kong) Limited ...... Horace Tse ; Jessie Xu ; Dave Dai, CFA To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Horace Tse ; Jessie Xu For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

China Oil & Gas Sector 79 12 January 2017

This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

China Oil & Gas Sector 80