China / Hong Kong Industry Focus China Gas Utilities Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 16 Mar 2021
Riding on energy transition HSI: 28,834
• Higher gas demand from increasing clean energy adoption in rural areas ANALYST • More co-operation between upstream and Patricia YEUNG +852 36684189 [email protected] downstream players Ian CHUI CFA, +852 36684174 [email protected]
• Expect gas distributors to post mid-teen growth in gas volume p.a. in coming years
• Top pick: China Gas (384 HK) Recommendation & valuation
T arget Mk t PE Positive policies to support clean energy. We believe gas Price Price Recom Cap 21F distributors are able to benefit from China’s journey to Company HK$ HK$ US$m x carbon neutrality in various aspects. Firstly, rollout of rural China Gas*#^ 30.05 36.00 BUY 20,177 12.1 coal-to-gas conversion with higher adoption of clean heating 384 HK system will continue as a major means to combat air China Resources Gas* 41.45 38.00 HOLD 12,356 16.2 1193 HK pollution. Secondly, the opening of third-party access to the China Tian Lun Gas*^ 7.4 8.70 BUY 957 5.8 major gas transmission infrastructure by PipeChina allows 1600 HK diversified gas sources and accelerates market Enn Energy*^ 121.9 138.00 BUY 17,721 15.2 consolidation. Thirdly, clean production for the 2688 HK manufacturing sector will increase gas volume growth from Towngas China* 3.43 3.70 HOLD 1,312 6.6 industrial users. 1083 HK
Source: Thomson Reuters, DBS Bank (Hong Kong) Limited (“DBS HK”) Sustainable gas volume growth. The above initiatives, coupled with the dual circulation strategy, are expected to # FY21: FY22; FY22: FY23, ^Core EPS drive 9-10% gas volume growth in China in the next few years. More co-operation between upstream and downstream players will ensure gas supply and grow customer base and gas volume growth for gas distributors. We expect gas distributors under our coverage to register at least a mid-teen organic gas volume growth.
Top picks. We prefer stocks that can best ride on government policies during the energy transformation process and in this respect, China Gas (384 HK) is our top pick. The company has a more aggressive strategy in pushing clean energy into rural areas through its LPG smart microgrid business. It is also expected to have high-teen gas volume growth with improving cashflow in FY21. We also like ENN (2688 HK) for its growing integrated energy business amid carbon neutral trend and enlarging customer base on market consolidation. Our BUY rating on China Tianlun Gas is underpinned by its M&A strategy which can drive higher gas volume growth at high teens. It also benefits from the government’s policies in rural areas.
ed-TH / sa-CS / DL
Industry Focus
China Gas Utilities Sector
Expect low-teen growth in gas volume in 2021 Estimated gas volume growth Despite the COVID-19 pandemic, China is expected to register a 5-6% growth in natural gas apparent consumption in 2020, a drop of only <4ppts from 2019. This is underpinned by the effective preventive measures implemented by the China government, allowing substantial rebound in economic activities. In particular, gas apparent consumption growth was stronger at 9.6-12.4% in 4Q20. The exceptionally severe and long cold wave also helped to boost demand for gas for heating services.
China natural gas apparent consumption
Source: Companies, DBS HK * FY19 = FY3/20, FY20 = FY3/21, FY21 = FY3/22
More policies to support clean energy
As expected, one of the key areas of the 14th FYP is the enhancement of energy mix through accelerated development of clean/renewable energy to achieve China’s commitment to be carbon neutral by 2060. Natural gas also plays an important role in the transition where its share in the energy mix is expected to increase from around 10% in Source: CEIC, DBS HK 2020 to 13-15% in 2025. Looking into 2021, our economic team forecasts China to register a GDP growth of 7%, up from 2.3% in 2020. Due to The current action plans for the protection of the blue skies, a low-base comparison, GDP growth is expected to be clear waters and clean soil have been effective in reducing robust at 12.0% in 1Q21. This is on the back of stronger PM2.5 and air pollution. In fact, replacement of coal by gas production capacity with a gradual reopening of the global or electricity is believed to contribute at least one-third of economy, stronger domestic spending and higher new the reduction in PM2.5. Thus, these action plans will be infrastructure investment. China’s dual circulation strategy further strengthened with average penetration of clean in its 14th Five-Year Plan (FYP) will also drive more energy heating system in Northern areas rising to 70% in 2021, up demand. Apart from economic recovery, we reckon China’s from around 65% in 2020. The achievement of such a target journey to carbon neutrality will also accelerate the also depends on the availability of gas supply as well as replacement of coal by gas. renewal of the existing subsidy policy. Given more supply of gas, particularly from Russia, more provinces will push for Against this backdrop, we project natural gas apparent replacement of coal by gas in rural areas, such as Shandong, consumption to climb at least 10% in 2021 with a stronger Gansu, etc. growth of 13-15% in 1Q21, thanks to higher consumption from industrial and commercial users. We also forecast In addition, acceleration of construction of basic higher gas volume growth of 11-17% in 2021 for gas infrastructure, particularly for utilities services, for the distributors under our coverage. China Tianlun is the villages and rural areas are key for the integration of urban exception with a much stronger gas volume growth of >30% and rural areas. This also echoes with the No.1 Central in FY21 due to M&As made in late December 2020. Document which highlighted the promotion of gas to the Stripping out the impact from M&A, we estimate that it countryside through the construction of rural gas storage would still post a robust mid-teen organic gas volume tank stations and micro-pipe gas supply systems. Thus, growth in FY21. China Gas’s LPG smart microgrid business (which covers the
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China Gas Utilities Sector
remote parts of rural areas), and China Tianlun Gas’s rural coal-to-gas conversion operations will have stronger growth Major gas pipelines for third-party access potential. 3 Pipeline ‘000 m /day In addition, in view of China’s carbon neutrality targets, we Shaanxi-Beijing Pipeline (Route I to IV and 544,790 expect a stronger push for replacement of coal in the Yongtang-Qin section) industrial sector. In fact, a guideline from China State (陕京线, 永唐秦管道) Council on the development of green recycling economy Tangshan LNG Pipeline (唐山 LNG 外输管道) 251,290 requires greener production for industrial sectors. Thus, the Sino-Russian Pipeline - East Route 437,700 delayed implementation of replacement of coal by gas in the (中俄东线管道) southern or eastern part of China will finally be executed China-Guizhou Pipeline (中贵联络线) 213,940 and will lead to stronger gas volume growth from industrial users. West-to-East Gas Pipeline (Route I, II and III) 1,966,600 (西气东输) Xinjiang Coal-to-Gas Pipeline Project (新气管道) 160,000 Opening up of the main oil and gas transmission Guangxi Gas Pipeline (广西管道) 180,010 infrastructure Source: PipeChina, DBS HK Following various rounds of asset transfer from the three national oil companies in 2020, China Oil and Gas Pipeline Network (PipeChina) became fully operational in September City gas project distribution 2020. This involves the majority of China’s midstream infrastructure, including at least 10 LNG terminals, three underground gas storage facilities, transmission gas pipelines (estimated 50,000km and 240bn m3 annual capacity). In addition, after taking over the natural gas pipeline network from the Guangdong government, PipeChina is expected to extend this to other regions and will gradually achieve full national coverage of gas pipelines in 2025 and further down to county level by 2035.
Besides these long-term goals, PipeChina also has a mission of establishing an open and fair platform for third-party access to its infrastructure. In fact, in less than two months of full operation, PipeChina implemented third-party access to its West East Pipeline system and LNG terminals (including Yuedong, Shenzhen Diefu and Hainan) in 2020. In addition, it has recently released details of spare capacity of Source: Companies, DBS HK its assets available for third-party access each month in 2021. For gas pipeline, a total of 4.4bn m3 of daily capacity Among the gas distributors under our coverage, China Gas will be available during March - December 2021, of which and ENN have the largest exposure to the above gas about 85% of capacity mainly comes from eight gas pipelines. We believe they are in a better position to benefit pipelines, particularly West-East Gas Pipeline (Route I, II and from the open access of PipeChina’s gas pipeline network. In III) in Xinjiang and northern provinces. Such rapid progress fact, ENN has also tapped into unconventional gas in of opening up access to its assets is beneficial to gas Sichuan and Shanxi, as well as increased the amount of distributors who can diversify their gas resources and imported LNG to replenish its gas resources. We believe reduce their gas costs. these initiatives are able to reduce its gas costs and expand its dollar margin.
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In addition, the setup of PipeChina has also formed a next five years. These initiatives will bring unconventional “x+1+x” market structure which allows upstream and gas from the current 10% of total output to around 17% by downstream players to extend their operations, either 2025. through strategic co-operation or M&A. For downstream players, co-operations with upstream players can secure gas With an unusually cold winter which started in December sources while larger-scale operations through M&As can 2020, imported natural gas from Russia more than doubled ensure gas volume growth. In fact, China Gas has recently in early January 2021. The pipeline extension from signed a strategic agreement with China PetroChemical for Changling in Jilin to Yongqing in Hebei also helps in co-operation in various aspects, such as procurement of stimulating more demand. We estimate gas supply from natural gas and LPG, M&A of downstream gas projects, etc. Russia to jump from 5bn m3 in 2020 to at least 10bn m3 in China Tianlun Gas has also recently completed an 2021, and gradually ramp up to its full capacity of 38bn cm acquisition. Thus, we expect gas distributors to step up their in the next few years. efforts in securing new projects.
Growth in imported LNG Increase in supply positive to dollar margin
On the supply side, we estimate the overall gas supply to expand by at least a high single-digit each year. This is underpinned by an increase in domestic production, ramp- up of Power of Siberia (Russian gas) and higher amount of LNG imports.
Supply of natural gas in China
Source: CEIC, DBS HK
Coupled with a high single-digit growth in imported LNG, we estimate the percentage of imported natural gas to remain steady at around 43% of total supply in China.
We expect dollar margin of gas distributors to remain relatively stable with a mild uptrend, due to:
1) More diversified procurement of natural gas has Source: CEIC, DBS HK lowered gas cost; 2) Increase in supply from the Power of Siberia Growth in unconventional gas supply will be a new driver for pipeline and LNG imports will provide a good increase in domestic production, given conventional gas balance in demand and supply; reserves have shown signs of depletion. After the 3) China’s plan of carbon neutrality has induced three completion of phase I of the Weirong development, a new oil majors to put more focus in the production of shale gas field in Sichuan, phase II will start soon. Coupled clean energy, thereby increasing domestic with the Fuling field in Chongqing, Sinopec targets to production. increase shale gas output to 13bn cm by 2025. PetroChina also aims to more than double shale gas output to 24bn cm and increase coal-bed methane to 3bn cm. Apart from increase in conventional gas production, CNOOC is also focusing on other clean energy development projects, including shale gas, coal-bed methane and tight gas, in the
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Our top pick small operation scale. Our TP of HK$8.40 is based on DCF valuation (1.5 beta, 8.7% WACC and 1% terminal growth). We prefer players that are in a better position to ride on the government’s policies under the 14th FYP and the carbon neutrality journey. Our top pick is China Gas (384 HK) as 1) it PE vs earnings CAGR can benefit more than its peers from the government’s policies in development of rural areas through its LPG smart microgrid operation; 2) it has strong gas volume growth at high teens, thanks to increase in gas supply in Northeast China through Russian gas; 3) strong partnership with upstream players to ensure gas supply and sustain robust organic gas volume growth; and 4) improvement in cashflow will be good share price catalyst. Our TP of HK$36.00 is based on DCF valuation (1.1 beta, 8.1% WACC and 1% terminal growth).
We also like ENN (2688 HK) as 1) its integrated energy business has strong growth potential amid China’s carbon neutrality journey; 2) we expect ENN to secure more new projects on market consolidation; 3) robust gas volume growth is expected to be sustained at high teens. Our TP of HK$138 is based on DCF valuation (1.2 beta, 9% WACC and
1% terminal growth).
We also have a BUY rating on China Tianlun Gas (1600 HK) as 1) we expect it to complete more M&A deals on market consolidation which will be a good share price catalyst; 2) it has a robust gas volume CAGR of 19% for FY19-22; 3) its rural coal-to-gas conversion operations will also benefit from the government’s policies; and 4) its low valuation represents a deep discount to its peers due to its relatively
Valuation comparison
F Y20-22 YTD Mk t PE PE Yield Yield P/Bk P/Bk EV/EBITDA ROE ROE Earnings share Net gearing Price Cap F iscal 21F 22F 21F 22F 21F 22F 21F 22F 21F 22F CA GR Perf. 20A 21F Company Name Code HK$ HK$m Yr x x % % x x x x % % % % % % Gas - Hong Kong Beijing Enterprises 392 HK 26.55 33,507 Dec 4.0 3.8 5.1 5.0 0.4 0.4 6.1 6.0 9.9 9.6 7.7 4.9 51.7 52.7 China Gas*#^ 384 HK 30.05 156,632 Mar 12.1 10.5 2.3 2.7 2.7 2.2 9.1 7.8 24.2 23.3 15.7 (2.4) 71.1 59.2 China Resources Gas* 1193 HK 41.45 95,916 Dec 16.2 14.4 2.4 2.7 2.6 2.3 8.5 7.6 16.9 16.9 11.7 0.5 Cash Cash China Tian Lun Gas*^ 1600 HK 7.40 7,427 Dec 5.8 4.9 5.2 6.1 1.1 1.0 5.0 4.3 21.6 21.5 18.8 (0.9) 74.1 68.0 Enn Energy*^ 2688 HK 121.90 137,568 Dec 15.2 12.6 2.1 2.5 3.1 2.7 9.1 7.8 21.9 22.6 23.3 7.1 27.8 21.9 Kunlun Energy 135 HK 8.02 69,444 Dec 10.0 9.1 4.2 4.1 1.0 0.9 3.7 3.7 10.2 11.1 7.8 19.7 28.5 20.9 Towngas China* 1083 HK 3.43 10,183 Dec 6.6 5.8 4.5 5.1 0.5 0.4 6.0 5.5 7.2 7.7 12.7 (2.0) 38.3 36.0 10.0 8.7 3.7 4.0 1.6 1.4 6.8 6.1 16.0 16.1 14.0 48.6 43.1
# FY21: FY22; FY22: FY23, ^Core EPS
Source: Thomson Reuters, *DBS HK
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DBS HK recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame)
*Share price appreciation + dividends
Completed Date: 16 Mar 2021 10:06:25 (HKT) Dissemination Date: 16 Mar 2021 10:33:38 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified.
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1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Beijing Enterprises Holdings Ltd (392 HK), China Gas Holdings Ltd (384 HK), China Resources Gas Group Ltd (1193 HK), ENN Energy Holdings Ltd (2688 HK) and Kunlun Energy Co Ltd (135 HK) recommended in this report as of 12 Mar 2021.
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DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, Capital Square, 12 Marina Boulevard, 18 Westlands Road, Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100, Kuala Lumpur, Malaysia. Marina Bay Financial Centre Tower 3 Tel: 852 3668 4181 Tel.: 603 2604 3333 Singapore 018982 Fax: 852 2521 1812 Fax: 603 2604 3921 Tel: 65 6878 8888 e-mail: [email protected] e-mail: [email protected] e-mail: [email protected] Co. Regn No. 198401015984 (128540-U) Company Regn. No. 196800306E
INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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